Use of subcontractors by approved independent advisers

Published 1 September 2007

The second issue that has been of concern to the Panel has been that of the use of subcontractors by independent advisers, particularly where there is a special skill required that the approved adviser does not possess.

The term “subcontractor” as used here generally means a professional who has a specialised skill outside of the usual skills possessed by an independent adviser, and who will be reporting to the shareholders of the target company as part of the independent adviser’s report.

Although it is the responsibility of the target company board to appoint an independent adviser, that appointment must be approved by the Panel. The Panel carefully considers both the experience and the independence of an adviser put forward for approval.

In some cases it is apparent that the adviser will need specialist help with a particular aspect of an assignment. One example may be that the target company operates in a specialist field such as mineral exploration. Another example may be that the most important aspect of the takeover is that it will result in a change of legal form of the investment (for example conversion from shares in a company to units in a unit trust).

In such cases the firm to be appointed as the primary adviser may need additional assistance, such as specialist mineral valuation advice, specialist legal advice, or specialist financial advice. The person or firm providing this specialist assistance will be a subcontractor to the principal independent adviser and their contribution will be identified and attributed in the adviser’s final report.

When the need for such subcontracted assistance arises the Panel expects to see the same standard of competence and independence observed by the subcontractor as for the primary adviser. Detail about any proposed subcontractor should be provided to the Panel along with the original application for the primary adviser’s approval. The Panel will satisfy itself as to the competence and independence of the subcontractor before the primary adviser is approved, and the Panel’s approval of the primary adviser will be given on the basis that the named subcontractor carries out a particular role.

The Panel’s view is that the choice of subcontractor is one which the primary adviser (and not, for example, the target company) must make. The primary adviser retains ongoing responsibility for the advisory role throughout the Code transaction. The subcontractor must, like the primary adviser, satisfy the Panel that it is suitably qualified and independent.

In a recent case the adviser seeking the Panel’s approval proposed to use a specialist company to provide valuations of the particular assets of the bidder and the target (it was to be a scrip bid). The primary adviser was to be assisted by a specialist asset valuer who was in turn to be assisted by two experts with a close knowledge of the company. One of these experts was closely associated with the target company (named in the annual report). The Panel had to point out that the primary adviser had to be independent and could not use as subcontractors experts too closely associated with the target company.

The Panel’s guidance note has been amended to make it clear that the Panel expects the primary adviser to choose its own subcontractors and that its choice should not be dictated by the target company or any other party to the takeover or transaction.