Update to Guidance Notes

Published 1 March 2018

The Panel has recently updated its Guidance Note on Independent Advisers (the IA Guidance Note) and Guidance Note on Target Company Statements (the TCS Guidance Note). The changes were made following recent consultation with representatives of institutional and retail investors, independent advisers, and other market participants.

Guidance relating to the disclosure of principal assumptions underlying financial forecasts in target company statements was previously contained only in the TCS Guidance Note. However, it applies equally to independent adviser’s reports prepared in respect of Code-regulated transactions. Consequently, the guidance on principal assumptions has been updated and replicated (with consequential changes) in the IA Guidance Note. The guidance in the TCS Guidance Note has also been updated.

The updated guidance can be found in paragraphs 2.19 to 2.24 of the IA Guidance Note, which is set out below:

Disclosure of principal assumptions underlying forecasts

2.19 Independent adviser reports will ordinarily set out prospective financial information, comprising financial forecasts of the target company for one or more years, as it could reasonably be expected to be material to the decision of offerees to accept or reject an offer. Prospective financial information usually comprises forecasts that are based on information provided by the company appointing the independent adviser. 

2.20 The Code requires an independent adviser’s report to state the principal assumptions on which any prospective financial information is based. The Panel expects that the assumptions will directly accompany the relevant prospective financial information in the document and be set out in a way that is helpful and relevant for shareholders reading the report.

2.21 Prospective financial information will usually be based on many assumptions about future conditions and events which may or may not occur. The quality of the information will be dependent largely on the appropriateness of the assumptions. Providing shareholders with these assumptions assists them to make their own informed judgement on the quality and reliability of the information.

2.22 Assumptions can range from being reasonably certain to very uncertain. In setting out assumptions in a useful and relevant way it is likely to be helpful to address, among other things: 

(a) the degree of certainty/risk associated with particular assumptions and the key factors that could cause them to be incorrect;

(b) the extent to which assumptions relate to matters within or outside the control of the entity; and

(c) source material that has been used in deriving assumptions (e.g. past performance, third party reports or research, other market data). 

2.23 For shareholders to make their own informed judgement, it may also be necessary to provide information which assists them in assessing the sensitivities of prospective financial information, where appropriate (for example, where there may be significant risks that could render those assumptions invalid and therefore alter key financial information and impact valuation or merits). 

2.24 In determining what information to provide, the key question is whether it could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer.

The Panel’s guidance on clear, concise and effective independent adviser’s reports (paragraphs 2.17 and 2.18 of the IA Guidance Note) states that reports should highlight important information in balanced summaries. That guidance has been updated, and now states that reports should include a summary of the adviser’s conclusions on the merits of the transaction near the front of the report.

Finally, the Panel’s guidance on conflicts of interest in respect of independent adviser applications (paragraph 3 of Appendix A to the IA Guidance Note) has been updated to remove “current auditor for any party to the transaction” from the list of types of relationship which may lead the Panel to conclude that the proposed adviser is not independent when considering an application to act as independent adviser in respect of a Code-regulated transaction. The Panel has decided that excluding advisers with an auditor relationship is unnecessarily restrictive and unrealistic, particularly given the small size of the New Zealand market.

If you have any queries about the updated guidance, please feel free to contact the Panel executive.