The Panel executive has seen instances where the principal assumptions underlying prospective financial information have either not been stated or have been stated in such a bland way that they disclose little information that is useful or relevant. When considering the adequacy of disclosed assumptions the Panel notes this advice from the New Zealand Institute of Chartered Accountants:

Prospective financial information will 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 these assumptions. Therefore, users are to be provided with these assumptions so as to make their own informed judgement on the quality and reliability of the assumptions. For users to make their own informed judgement, it is necessary to provide information which assists them in assessing the sensitivity of prospective financial information to changes in assumptions which are subject to high degrees of uncertainty.

(FRS-29 Prospective Financial Information issued in 1996 paragraph 5.6)

Where target company statements and independent adviser reports do not include an adequate description of the principal assumptions underlying any prospective financial information that they contain, the Panel has generally required the target company to issue a correcting statement. This has to be distributed to all target company shareholders to mitigate the effect of what is, in essence, a breach of the Code.

If the correcting statement is distributed to target company shareholders without delay the Panel is unlikely to take any further enforcement action.

Those who prepare target company statements and independent adviser reports should ensure that the principal assumptions underlying any prospective financial information are adequately described.

INFORMATION ABOUT ASSET VALUATIONS

The Code states that the target company statement must include
If any information in the target company statement refers to a valuation of any asset, (a) the date of the valuation, the identity of the valuer, and a summary of the valuation, that discloses the basis of computation and the key assumptions on which the valuation is based; and (b) an address or addresses where copies of the valuation are available for inspection and a statement that a copy of the valuation will be sent to any offeree on request. (Clause 20 of Schedule 2)

This requirement applies whether the independent adviser’s report or another part of the target company statement refers to the valuation of the asset. The disclosure required by clause 20 can be in the body of the independent adviser’s report and/or in the directors’ part of the target company statement. Disclosure in either place will comply.

Where a target company is a property development company, with a significant number of investment properties which are included in the company’s financial statements at market value, this reference in the financial statements will not generally constitute a reference to the valuation of an asset for the purposes of clause 20. Specific reference to valuations of one or more individual assets would be needed for the disclosure requirements to be triggered.

If a target company commissions its own expert opinion on the value of its shares and refers to this value in the target company statement (in addition to the independent adviser’s report) then the Panel is likely to consider that this is the valuation of an asset (being the value of the target company itself). This should be summarised in the target company statement to the extent required by clause 20 and be available to any shareholder who requests it.

INFORMATION ABOUT MATERIAL CHANGES IN THE FINANCIAL OR TRADING POSITION OF THE TARGET COMPANY

The target company statement must include All material changes in the financial or trading position, or prospects, of the target company since the annual report referred to in subclause (1) [being the most recent annual report] or a statement that there are no known material changes. (Clause 18(4) of Schedule 2)

Sometimes quite a long time may have elapsed between the company’s last annual report and the target company statement. Interim financial statements may have been published in that time. An independent adviser’s report will usually include prospective financial information. However, clause 18(4) requires all material changes in the financial position or prospects of the target company since the last annual report to be identified.

Subsequent interim financial statements or the independent adviser’s report are not enough for compliance, unless the independent adviser’s report specifically identifies the material changes that have occurred since the last annual report.

APPROVAL OF TARGET COMPANY STATEMENT

The target company statement must include (1) A statement that the contents of the target company statement have been approved by the board of directors of the target company and (2) If any of the directors of the target company do not approve of the statement, their names and their reasons for not approving. (Clause 25 of Schedule 2)

It is common for a target company board to establish a committee of independent directors to handle all aspects of a takeover. This is particularly likely where an existing major shareholder is bidding to increase its stake, or an existing major shareholder has entered into a pre-bid lock-up arrangement with a new external party. This committee normally has fully delegated authority from the board of directors.
 
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