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One-Page Summary of Valtech Tips for Compliance with HKEX-GL116-23: Download

  • Our Recommendations:

  • Appropriate selection and application of valuation approaches

  • Well documented valuation process

  • Financial analysis in line with generally accepted theory in finance

  • Adhereance to Internationally Recognised Valuation Standards

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Disclosure of the Basis of Consideration and Business Valuations in Notifiable Transactions

In October 2023, The Stock Exchange of Hong Kong Limited (HKEx) published a guidance letter HKEX-GL116-23 (the “Guidance Letter”) outlining the disclosure gaps identified in transaction circulars from their previous vetting. The Guidance Letter underscores the need for listed companies to provide adequate explanation of the basis of determining the consideration of the transaction by disclosing in the transaction announcement sufficient and objective information with quantitative inputs and analysis to substantiate how the consideration was arrived at. In a recent review of issuers’ transaction circulars, HKEx found that the disclosure in some transactions was overly general and simplistic. As a result, in the Guidance Letter, HKEx provides guidance on the recommended disclosures of business valuation reports, as well as the recommended disclosures for transactions where no independent valuation is conducted. This article will explore the key aspects of the Guidance Letter and its potential implications for the disclosure of circulars or announcements related to acquisition or disposal transactions.

What’s the Guidance Letter about?

The Guidance Letter states that, regardless of which valuation approach is adopted, the issuer shall provide an explanation of why and how the adopted approach is appropriate for the transaction. It also provides an overview of the necessary information that should be included in the circular or announcements of the transaction to substantiate how the consideration was arrived at. Under the current requirements of Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”), when an issuer conducts an acquisition or disposal that constitutes a notifiable transaction, it must disclose the basis for determining the consideration and the terms of the transaction. Where the consideration of the transaction is determined primarily with reference to an independent valuation report of the target company (the “Target”), the transaction circular should contain a valuation report of the Target or a summary of the valuer’s views and analysis, as well as all material factors contained in the valuation report. These include, but not limited to, the effective valuation date, scope and limitation of work, valuation approach(es) or method(s) adopted, key inputs and assumptions adopted, conclusion of value and the identity, qualification and independence of the valuer.

It’s important to note that this summary provides a condensed overview of the Guidance Letter’s content. For a more detailed understanding, you can refer to the official HKEx announcement at this link: https://en-rules.hkex.com.hk/sites/default/files/net_file_store/GL116-23_e.pdf