Directors warn of pitfalls in valuation process

PUBLISHED : Thursday, 31 January, 2002, 12:00am
UPDATED : Thursday, 31 January, 2002, 12:00am

Shareholders were told they should not rely solely on an independent valuation report when assessing the fairness of Extrawell Pharmaceutical Holdings buying a company controlled by its directors.

Right & Rise, formed in July last year, is 67 per cent-owned by Extrawell directors Mao Yumin and Xie Yi. Mr Mao is the dean of the school of life science of Fudan University in Shanghai.

Right & Rise's sole asset is rights to commercially exploit 19 patent-pending genes found or believed to be associated with diabetes, licensed from Shanghai Biowindow - a company controlled by Extrawell's directors.

Yesterday, shareholders approved the main board-listed drug seller Extrawell's acquisition of Right & Rise for HK$95 million, to be paid in HK$30 million cash, HK$37.5 million of Extrawell shares and HK$27.5 million in a promissory note. The deal tightens directors' control, giving them 50.2 per cent of Extrawell, up from 46.5 per cent.

Under Hong Kong listing rules, the directors have to make a mandatory general offer for shares they do not own, but the Securities and Futures Commission has granted a waiver.

Independent valuer Castores Magi Surveyors valued Right & Rise at HK$171 million, based on a replacement-cost approach.

It assumed Right & Rise had taken security measures against intellectual property rights infringement and commercial spies. It did not investigate Right & Rise's legal title.

Extrawell's directors said gene transaction records used by Castores might not be identical to, and in the same stage of development as, its 19 genes, and valuation adjustments might be subjective.

They also said it was the first time Castores had used the replacement-cost approach to value intangible assets. 'Independent shareholders should not rely solely on the valuation report prepared by Castores for their consideration of the terms of the acquisition,' shareholders were told in a document on the transaction.

Mr Mao expected Right & Rise needed to invest just 'a few million Hong Kong dollars' in research and development to make the 19 genes commercial, as it could generate revenues from technology licensing.