In a recent disciplinary action by Hong Kong Stock Exchange (HKEX) against a GEM listed issuer (Company), it was found that the directors' confirmation of "no material adverse change" set out in the Company's prospectus was given without reasonable basis – and therefore "misleading".
The Company and its founder (who was also an executive director and the chief executive officer), as primary decision-maker of the Company's business, were censured. Other relevant directors were also criticised.
The prospectus (dated 27 September 2019) only set out the Company's financial performance up until 31 March 2019 – six months before publication – with directors confirming no material adverse change to the financial position in the meantime.
But it turned out that the Company's financial performance had deteriorated since August 2019.
Upon HKEX's enquiry, it was noted that there were in fact red flags of deterioration before publication of the prospectus, but no follow up steps were taken. In addition, the Company failed to prepare its monthly management accounts for the months of August and September 2019 without valid reasons.
HKEX took the view that the decline in the Company's financial performance for the months of August and September 2019 constituted adverse changes, representing deviation from the position in the Company's profit forecast submitted to HKEX and the directors' confirmations of "no material adverse change" disclosed in the prospectus.
The directors' "no material adverse change" confirmations were therefore made on the basis of inaccurate and incomplete information.
In addition, the Company's actual listing expenses (SGD 7.9 million) increased by 80% from those forecast in the prospectus (SGD 4.4 million). The increase (which amounted to nearly 19% of the total listing proceeds) was primarily attributable to an underwriter's bonus and a listing consultant's fee.
HKEX found that the founder – in agreeing to the payments without satisfactory explanation – failed to act in the best interests of the Company and protect the Company's assets.
Takeaway. Directors of listing applicants are reminded that a statement of "no material adverse change" in the prospectus should not be made lightly without reasonable basis. They should endeavour to obtain latest financial information and consider how the position of the company has evolved since the end of the period reported in the accountants' reports.
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