The Code is not only about takeover offers. The Code's provisions also apply where shareholders increase their control percentages above 20% by acquisitions from other shareholders approved by a meeting of shareholders under rule 7(c) of the Code, and by allotments approved by shareholders under rule 7(d) of the Code.

Under rules 7(c) and 7(d), and also under the terms of some analogous Panel exemptions, a report from an independent adviser on the merits of the acquisition or allotment must be provided to the shareholders entitled to vote on the relevant resolution.

In each case the shareholders (excluding the acquirer/allottee and its associates) are given the right by the Code to approve or reject proposals for another person to increase its control percentage of the code company. The Panel believes this right to approve should be exercised by the relevant shareholders with care and on the basis of good advice.

The Panel believes that it is an important part of the adviser's role to ensure that shareholders are properly advised of their rights under the Code. For example, shareholders should be made aware that it is not necessary to approve a proposal simply because there are few negatives. Shareholders can vote to allow the status quo to continue having taken into account reasons for and against that course of action.

We now comment specifically on some of the main reports prepared for shareholder meetings conducted under the Code.

Under rule 18 of the Code:

The directors of the code company must obtain a report from an independent adviser on the merits of any proposed acquisition under rule 7(c) or allotment under rule 7(d) having regard to the interests of those persons who may vote to approve the acquisition or allotment.

A rule 7(c) acquisition is one where shareholder approval is being sought to an acquisition of a parcel of shares by one shareholder from another existing holder. The acquiring shareholder will be obtaining a shareholding of over 20%, or increasing an existing shareholding to somewhere between 20% and 50%⁸ , from another party or parties. The acquisition may be of a Code company's shares, or it may be of the shares of another company, generally an upstream company that controls voting rights in the Code company.

The independent adviser is not advising the parties to the transaction, but instead those who have the right to vote to approve or disapprove the acquisition. As such, valuation may or may not be the key issue. The consideration for the transaction may well be an issue if the acquirer is obtaining a controlling parcel of shares without making an offer to remaining shareholders. The price being paid could impact on the market value of the holdings of existing shareholders if the parcel is large enough. The adviser may address the question of whether the value of the voting shareholders' shares is likely to be affected by the level of consideration.

The shareholders of the Code company, other than the buyer(s) and the seller(s), must approve any changes in holdings of shares that increase the acquirer's holding⁹ above 20%¹⁰ unless the acquiring shareholder makes either a full or a partial bid for the target company in which all shareholders would have the right to participate.

Factors covered in a report might include, among others:

The Panel would prefer not to see advisers refer to transactions as being "fair" or "not fair" to shareholders. See page 7 above for the Panel's views on discussions about the "fairness" of transactions.