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:

Valuation Approach Disclosure Requirement
Apply to any adopted approach
  • an explanation of why and how the use of the adopted approach is appropriate for the transaction being considered
  • where more than one valuation approach is used, an analysis of the different values derived and how they contribute to the final appraised value
Valuation Assumptions Disclosure Requirement
Market approach
  • key inputs such as the financial information of the target (Target) and the pricing multiples
  • details of the selection criteria for the market comparables (including quantitative benchmarks) and the bases for excluding those (if any) that meet the selection criteria
  • details of the selected market comparables (their business and financial information)
  • details of any adjustments made for differences between the Target and the market comparables
Income approach
  • the key, specific assumptions underlying the financial projections, in particular quantitative assumptions and the supporting rationale
  • the key inputs (e.g., the discount rate and terminal growth rate) to the valuation
  • an explanation of the computation process showing how the key inputs are applied to the financial projections to arrive at the base value of the Target
  • a reconciliation of any difference between the final appraised value and the base value
  • a sensitivity analysis
Cost approach
  • the quantitative inputs used to determine the gross current replacement or reproduction cost (GCR Cost)
  • the amount of depreciation adjustment made to GCR Cost to account for the physical and economic obsolescence and any technical deficiency
  • the computation process for the final depreciated replacement or reproduction cost
Asset-based approach
  • key quantitative inputs and assumptions used in the calculations of the appraised values for each asset and liability of the Target and the computation process
  • an explanation of the material difference, if any, between the book values and appraised values

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.

Visit us at mayerbrown.com

Mayer Brown is a global services provider comprising associated legal practices that are separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England & Wales), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer Advogados (a Brazilian law partnership) and non-legal service providers, which provide consultancy services (collectively, the "Mayer Brown Practices"). The Mayer Brown Practices are established in various jurisdictions and may be a legal person or a partnership. PK Wong & Nair LLC ("PKWN") is the constituent Singapore law practice of our licensed joint law venture in Singapore, Mayer Brown PK Wong & Nair Pte. Ltd. Details of the individual Mayer Brown Practices and PKWN can be found in the Legal Notices section of our website. "Mayer Brown" and the Mayer Brown logo are the trademarks of Mayer Brown.

© Copyright 2023. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.