The value of an asset, including a business, that a listed company wishes to acquire, could be material to investors in their decision-making, including whether a shareholder would vote in support of the transaction.
Companies pursuing acquisitions or disposals of assets, including businesses should therefore be mindful of market and regulatory scrutiny.
The SGX Listing Rules require independent valuations to be conducted for transactions including acquisitions or disposals that meet the Listing Rule thresholds for very substantial acquisitions and reverse takeovers.
Valuations must be undertaken subject to a robust procedure surrounding the assumptions and methodologies. The valuation report provides transparency and forms an important basis for shareholders and the investing public to assess the commercial merits of a transaction. This column sets out our expectations of valuations and the companies that disclose them.
What needs to be disclosed about a valuation
Companies should explain how a specific transaction will contribute to the company’s long-term business strategy for investors to understand its merits. The Board must apply rigour in assessing if the proposed transaction, including the commercial terms, are in the best interest of the company and shareholders.
See also: Live engagement and voting expected at all AGMs for FYs ending 30 June 2022 or after
Among details companies are obliged to disclose under the Listing Rules are:
- The value ascribed to the assets
- The party who commissioned the valuation
- The basis including the underlying methodologies and assumptions in arriving at the valuation
- The date of such valuation
- Whether the key assumptions and estimates used for the valuation, such as forward-looking earnings or cash flow projections, and peer or reference companies are reasonable
- Where material uncertainties belie the projections, these uncertainties must be fully disclosed
- Whether the valuation conclusion and limitation(s) as disclosed in the valuation reports are acceptable
See also: Regulator’s Column: Duties of directors under the Listing Rules
What boards should pay attention to
SGX RegCo has noted transactions with valuation practices that are open to doubt. In some cases, inputs to the valuation were erroneous. In others, key projections did not appear reasonable due to deficient disclosures, a failure to understand or challenge management on the assumptions provided or a lack of due care while performing the valuation.
We understand that making projections especially during uncertain times is difficult. Nevertheless, it is incumbent upon boards to scrutinise projections to ensure they are realistic and sound.
In reviewing the valuation, boards should examine if it was conducted independently by qualified and competent valuation professionals. They should consider the valuers’ track record in any questionable past transactions as well as the valuers’ credentials. Such considerations include whether the valuers are members of a professional business valuation body or authority, such as whether they are registered with the Institute of Valuers and Appraisers, Singapore (IVAS) as a Chartered Valuer and Appraiser, and have the relevant experience in performing valuations for the assets under consideration. Boards should also assess if the valuation is performed in line with recognised valuation standards, such as the International Valuation Standards.
What two new trends have emerged and how they affect valuations
Boards and companies should also take note of two emerging trends in the field of valuation – the growing significance of intangible assets and environmental, social and governance (ESG) matters in business valuation.
With transactions increasingly involving businesses with new or disruptive technologies, companies should assess if the intangible assets and intellectual property under consideration are valued using appropriate methods and ensure that the basis of such valuation are adequately disclosed.
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Companies should also consider the ESG benefits and risks of their transactions and articulate how these drivers could affect the companies’ long-term prospects. SGX notes that these are growing areas in the business valuation space; companies should seek professional advice to ensure that the valuation methodologies and disclosures are up to date and reflect best practices in this regard.
Public market summary valuation letters should conform with acceptable disclosure requirements
IVAS has issued a Practice Note (“Practice Note 2: Minimum Disclosure Requirements for Summary Valuation Letters") on what should be contained in summary valuation letters. To assist companies with making consistent disclosures of business valuations, all companies should refer to the Practice Note in preparing their valuations disclosures. Companies should consult the Practice Note early in the valuation process, to ensure that the Board provides the necessary information to the valuers they engage.
SGX RegCo is reviewing if the Listing Rules should be further strengthened to raise the standards of business valuations, in line with our previous review for property valuations. In this regard, we will also consider mandating the application of the IVAS Practice Note 2 in appropriate circumstances.
Michael Tang is the head of listing policy and product admission at SGX, while Joanne Teo is an AVP of listing policy and production admission at SGX.