Guidance Note about the Role of Independent Advisers
for the purposes of the Takeovers Code
Third Edition
August 2007
Rule 18 report - on an allotment under rule 7(d) of the Code or an analogous Panel exemption
62.
A rule 7(d) allotment is one where the allotting company is going to allot sufficient shares to the allottee that its control of voting rights in the allotting Code company following the allotment
11 will be greater than 20%.
63.
The independent adviser is required to report on the merits of the allotment from the point of view of those entitled to vote on it. Those entitled to vote are the Code company's shareholders, excluding the allottee and its associates. As such they are likely to be minority shareholders whose interest in the Code company is being diluted. Depending on the nature of the allotment these shareholders may also have the right to participate in the offer being made, for example if there is a pro-rata offer being made to all shareholders but underwritten by a major shareholder (and approval under rule 7(d) is being sought in respect of that major shareholder).
64.
If the allotment being made is one where all shareholders have the right to participate then the merits of the allotment could include, among others:
(a)
How the allotment price relates to a number of different reference points, including, but not limited to:
(i)
The recent market values of the allotting company's shares;
(ii)
A valuation of the whole company;
(iii)
Discounts employed in other allotments or placements in the market.
(b)
The likely value of any rights to acquire shares that the allottee shareholder may receive, whether they are tradeable, and the impact on a shareholder's existing holding if the rights are not exercised (and an underwriting shareholder increases its control)
12;
(c)
The purpose or purposes to which the proceeds of the allotment are intended to be put;
(d)
If there is a major shareholder underwriter of the issue:
(i)
the process the target company followed before deciding to enter into an underwriting agreement with the major shareholder;
(ii)
the basis on which the underwriting terms were agreed with the underwriting shareholder;
(iii)
the likelihood of the underwriter being called upon;
(iv)
the ongoing effect on the control and direction of the company if there is a significant shortfall in subscriptions to the issue, with the unsubscribed shares to be taken up by the underwriter.
(e)
The effect on control of the company if the non-associated shareholders (i.e. those for whom the report is being written and who will have the opportunity to vote on the allotment) participate, or do not participate, in the offer;
(f)
The consequences for the non-associated shareholders and the allotting company if the shareholders vote against the allotment, having regard to the provisions of the Code and the existing structure of voting control within the company.
65.
Again, the Panel recommends that the allotment not be described in terms of its "fairness" or "unfairness".
66.
If the allotment is one in which the non-associated shareholders will not have the right to participate, but is one where the principal allottee is intended to obtain a significant stake, or increase an existing stake, in the allotting company, the only issue for the non-associated shareholders to decide is whether to vote for or against the proposed allotment. The independent adviser's role is to advise the voting shareholders on the merits of voting for or against the proposed allotment. Factors that the adviser could consider in such a report may include, among others:
(a)
The purposes to which the proceeds of the allotment (if cash) will be put;
(b)
If the allottee is contributing business assets rather than cash, how these will change the existing business of the company. Comment on the value of the assets may be appropriate. Are there other benefits of a strategic or marketing nature?
(c)
The effect on the control position of the allotting company if the allotment proceeds;
(d)
A comparison of the allotment price with recent market prices for the shares of the allotter and the value of the company, and its likely effect on the future market value of the non-associated shareholders' shareholdings (diluting effect);
(e)
The consequences for the company and the non-associated shareholders if the allotment is not approved. Could the company fail? Could the company be foregoing a valuable opportunity to obtain new capital that may not arise again?
Footnotes:
11
As with an acquisition, the allottee's prospective holding will be aggregated with the holdings of its associates for the purpose of determining if the Code applies to the allotment.
12
Note that as a matter of policy, where the Panel grants an exemption from rules 7(d) and 16 to allow an underwriting shareholder to increase its control percentage through taking up a shortfall in a rights issue it will be a condition of the exemption that the underwriting shareholder is not able to purchase rights in the market, whether it intends to exercise those rights or not.
