November 27, 2021

Hong Kong: The duties of Hong Kong company directors and valuers: The SFC issues a warning

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Article by Alex Potts From Sedgwick Chudleigh

Nearly half of the market capitalization of the Hong Kong Stock Exchange is represented by companies incorporated in either Bermuda or the Cayman Islands.

Directors, officers, and insurers of such companies need to keep abreast, therefore, of both Hong Kong law, as well as the laws of Bermuda and the Cayman Islands.

On 15 May 2017, Hong Kong’s Securities and Futures Commission (‘the SFC’) published an important Guidance Note on Directors’ Duties in the Context of Valuations in Corporate Transactions.

The SFC explains that it has issued the Guidance Note because it has become increasingly concerned that, in some transactions (both as regards asset acquisitions and asset disposals), Hong Kong listed companies either do not obtain a valuation at all, or their directors place an unreasonable, or unquestioning, degree of reliance on a suspect valuation.

As a result, there have been a number of transactions reported to the SFC in which assets have been acquired at unreasonably high prices, or assets sold at substantial undervalues, to the potential prejudice of shareholders or creditors.

The Guidance Note applies to all directors of a listed issuer of the Main Board or GEM of the Stock Exchange of Hong Kong Limited, and it is based on the obligations that directors are already subject to, as a matter of both Hong Kong, Bermuda and Cayman Islands law.

On the same day, the SFC published a separate Statement on the Liability of Valuers for Disclosure or False or Misleading Information.

In publishing these Guidance Notes and Statement, the SFC has issued a stark warning to listed company directors and valuers to be mindful of their responsibilities, or run the risk of enforcement action by the SFC, as well as claims by shareholders and creditors.

Under section 214 of the Securities and Futures Ordinance (‘the SFO’), the SFC is able to bring proceedings in the High Court of Hong Kong to seek redress for misconduct or other wrongdoing towards a listed corporation or its members by any person responsible for the conduct of the business or affairs of the listed corporation.

Under sections 277 or 298 of the SFO, a valuer may be liable if it has authorised or was concerned in a listed company’s disclosure of false and misleading information that is likely to induce investment decisions or have a material price effect and the valuer knows that, or is reckless or negligent as to whether, the information is false or misleading.

The SFC may bring proceedings under section 213 of the SFO for remedial orders and, if a valuation is included in a prospectus, the valuer may be civilly liable to pay compensation to investors.

Similar proceedings may also be asserted against directors, officers and service providers in the jurisdiction of incorporation, whether Bermuda or the Cayman Islands, and whether by regulatory authorities, liquidators, creditors or shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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