Such comments may relate to the description of Code issues or the comprehensiveness of the discussion on the merits of the proposed takeover or transaction. They will not relate to the adviser's methodology or valuation analysis.

The Panel's aim is to see the continual improvement in the standard of reporting by independent advisers while at the same time broadening the number of advisory firms able to undertake Code assignments.

Based on its early experiences with the review of draft and completed independent adviser reports the Panel decided that it should give some guidance to the independent advisers as to the scope and content of reports required for each type of transaction under the Code. The Panel published the first edition of its Guidance Note about the Role of Independent Advisers in March 2003. This was followed by the publication of a second edition in July 2003 incorporating helpful comments received from the market.

In general the feedback on the Panel's guidance note has been positive. Some advisers found the guidance particularly helpful as they were able to point out to prospective clients the scope of reports required under the Code.

With the benefit of more recent reports and feedback from the advisers themselves the Panel decided to further revise its guidance note. The third edition has been published and is available on the Panel's website. The new edition incorporates additional comment on four particular areas:

• an excessive emphasis by independent advisers on the "fairness" of transactions;
• the appropriate relationship between an independent adviser and any subcontractor required to assist the independent adviser in undertaking adviser assignments under the Code;
• the need for clarification in relation to the way independent advisers comment on the merits of partial offers;
• the question of independence of advisers when a bidder makes successive offers for the same target company.

These issues are discussed in turn.

The evolution of independent adviser reports and the use of "fairness"

When the Code started in operation in 2001 the concept of a "merits" report was new to most advisers.

The experienced advisers had been routinely involved with reporting to the New Zealand and Australian stock exchanges as independent appraisers on transactions where the usual requirement of the respective listing rules was that the appraiser should express a view on the "fairness" of transactions to the relevant shareholders.

For Code purposes the advisers' reports typically open with a discussion of the offer and of the target company and its sector of operations. They usually include a valuation of the target company, generally using the recognised valuation method considered most appropriate by the adviser. The reports generally conclude with an evaluation of the "merits" of the offer.

Up until recently the first, and usually highlighted, part of the merits section of the report involved a comparison between the adviser's valuation of the target company and the offer price. If the offer price came within the adviser's valuation range then the adviser would describe the offer as "fair". If the offer price was below the adviser's valuation range then the offer would be described as "not fair".

This approach influenced the takeovers market in a number of ways:

• the advisers' emphasis on offer price versus assessed value as the determinant of "fairness" made price appear to be the most important issue in a takeover, rather than being just one of a number of merits;
• independent directors of a target company generally would not recommend acceptance of an offer that was "not fair". In a number of cases the consideration given under takeover offers was increased to within the independent adviser's valuation range so that the target company's independent directors could then recommend the offer to shareholders - largely ignoring consideration of the wider merits of the offer;
• offerors would use a conclusion of "fair" in relation to an offer price as an argument for shareholders to accept their offer despite the offer otherwise being considered unmeritorious by the independent directors.
• there is anecdotal evidence that directors of some companies have been relying too heavily on the analysis work of the adviser rather than developing their own fully considered views on a particular offer.
• the media would generally concentrate on the summary statement by the adviser that "the offer is fair" (or "not fair") when reporting on an offer. Few would pay much attention to the other merits of an offer;

Page 2 | Code Word September 2007

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