Hong Kong Issuers Must Substantiate Basis of Consideration and Valuations with Quantitative Details

The Hong Kong Stock Exchange (HKEX) has issued a new guidance letter (HKEX-GL116-23) urging issuers to disclose sufficient details (with quantitative inputs and in specific terms) to substantiate how consideration of a notifiable transaction is arrived; and where consideration is primarily based on an independent valuation, key assumptions and valuation inputs must be disclosed.

In a recent review of issuers’ transaction circulars, HKEX said it found that disclosure in some cases was overly general and simplistic. 

HKEX emphasised that it would not be sufficient to include merely qualitative or narrative statements without specific quantitative disclosures of the relevant figures. For example, a mere statement in the valuation report that comparable companies were selected on the basis that they were “mostly” or “mainly” engaged in certain businesses, without providing any quantitative benchmark, was unacceptable.

Below is a summary of the key disclosure requirement on business valuation set out in HKEX-GL116-23:

 

This latest advisory also provides guidance on disclosure in notifiable transactions where no independent valuation is disclosed. In essence, issuers are reminded to provide adequate and relevant disclosure (both quantitative and qualitative) of the underlying performance that is key to determination of the consideration.

Key takeaways:

1. Although the focus of this guidance letter appears to be on the disclosure of valuation in notifiable transaction circulars, same principles would equally apply to notifiable transaction announcements with valuations. As set out in HKEX’ Listed Issuer Regulation Newsletter (Issue 8 of June 2023) on ‘disclosure of business valuations in transactions’: where the valuation of a target company is a primary factor in forming the basis for the consideration or other material terms of a notifiable transaction, disclosure of the valuation would need to be made in the relevant announcement and circular. In other words, going forward, clear explanation on the selection of valuation approaches, and detailed and specific disclosures on major valuation assumptions and inputs should also be disclosed in the relevant transaction announcement.
2. In addition, even though this new guidance letter refers to notifiable transactions only, we expect that HKEX would also require similar stringent disclosure on valuations for connected transactions.