On 24 March 2008, the Singapore Exchange Limited (“SGX”) issued a News Release in the Regulator’s Column (please refer to
www.sgx.com for the full details) setting out the responsibilities of boards of directors and their financial advisers in assessing acquisitions involving profit guarantees.
The release is issued as a number of listed companies have proposed to acquire businesses or assets where the purchase consideration is based on or includes profit guarantees provided by vendors, in order to put safeguards to ensure that investors’ interests are protected.
The Release provides that company directors and their financial advisers should pay particular attention in assessing such deals when they are influenced by profit guarantees from the vendors. Following the acquisition, the company should make timely announcement on whether the guaranteed profit is met. The company should disclose in appropriate detail in the amount of and reasons for the shortfall and how the company is to be compensated if the guaranteed profit is not met.
The directors should check that such guarantees are realistic, taking into consideration the historic performance and prospects of the businesses or assets to be acquired. The SGX also wants a company to ensure that there are safeguards to protect investors’ interests if its purchase fails to meet its profit guarantee. Further more, a company has to ensure that the proposed acquisitions are in compliance with all relevant rules and regulations, including the Exchange’s requirements on Very Substantial Acquisitions, Major Transactions and Discloseable Transactions. The responsibilities of a financial advisor are to provide the Board with their opinion whether the proposed acquisition is on normal commercial terms. This opinion should also cover whether the proposed acquisition is prejudicial to the interest of the company and its shareholders. In addition, a financial advisor is required to be prepared to fully disclose the basis for its opinion if asked by the Board, the shareholders of the company or the Exchange.
The SGX will soon be determined if amendments should be made to SGX listing rules to provide more guidance on the responsibilities of the boards and financial advisers in assessing acquisitions involving profit guarantees.
Written by:
Ms Eng Hui Ting & Ms Chen Shu
Ms Eng Hui Ting
Corporate Finance Executive
Ph: (65) 6322-2237
Fax: (65) 6534-0833
Ms Chen Shu
Legal Executive, Corporate Practice
Ph: (65) 6322-2230
Fax: (65) 6534-0833
Loo & Partners
88 Amoy Street, Level Three
Singapore 069907