The purpose of this note is to assist those whose appointments as independent advisers have been approved by the Panel for the purposes of a report under any of rules 18, 21 or 22 of the Code or under a class exemption or specific exemption granted by the Panel from the Code. It should be considered an aide memoire. It is not intended to be a prescription by the Panel as to the matters an independent adviser must address in any report prepared for the purposes of the Code. It is expressed in general terms only and should not be regarded as comprehensive in any particular case. It should not be regarded as definitive and may be amended by the Panel from time to time.

The Code requires the adviser to give an assessment of the "merits" of the particular offer (takeover), acquisition (share transfer or buyback), or allotment from the point of view of the recipient (in the case of a takeover offer) or of the person who is required to vote on the proposal (acquisition or allotment).

Philosophically the Code is concerned with the effect of changes in control between recognised points - 20% to 50%, 50% to 90%, and above 90%. The Code provides rights for shareholders at each stage. A primary focus of a Code report would often be the merits of incremental changes in voting control. These issues may have particular relevance in changes of control in the 20% to 50% zone which was recognised in formulating the Code as a critical area.

The Panel believes that an important role of the independent adviser is to advise shareholders of their rights under the Code, and suggests the adviser should be careful not to imply a proposal is meritorious, particularly in the 20% to 50% zone, simply because there are few negatives. It may well be that continuation of the status quo may be the more desirable outcome unless there are good reasons why the shareholders should vote to approve a departure from it.

The Panel has now reviewed most independent adviser reports prepared under the Code. The Panel has been concerned that some reports have not fully addressed what the Panel sees as important elements of the proposals being considered. The Panel recently initiated a trial policy of reviewing advisers' reports in draft form before they are finally distributed to shareholders. This process has prompted the Panel to prepare this note. The matter of most concern to the Panel is that advisers have not always informed shareholders of the protections and rights available to them under the Code or of the options available to the acquirer/bidder as a result of the Code.

In all cases the report must be an independent adviser's report and as such the directors of the target company, the offeror, the acquirer, the seller, the allottee or the allotter should not influence the findings.

The Panel does not wish to prescribe the meaning of "merits" in relation to any particular transaction and nor does it wish to express a view of various valuation methodologies. The Panel makes the following suggestions in relation to some of the types of report that an adviser may be called on to complete.

Introductory Comments nn the Appointment of Advisers

Independent advisers' reports play an important role in the scheme of the Code. The Panel takes its responsibilities for approving the appointment of independent advisers very seriously. Frequently, because of the timeframes stipulated in the Code, the approval of the appointment of the adviser by the Panel, and the preparation of the report itself, have to be undertaken in very compressed time periods. This has a number of implications:

The process of preparing and distributing independent advisers' reports within the timeframes stipulated in the Code (at least in relation to takeover offers) creates a tension between providing a report that is sufficiently comprehensive so that the target company shareholders are well-informed, while also providing the directors of the target company with enough time to give full consideration to the contents of the report. This underlines how important it is for the adviser, and the target company, to be adequately resourced to cope with their responsibilities and deal with any issues that are necessary.

Reports Required in Relation to Takeover Offers

The Code requires independent advisers' reports to be prepared at the request of the target company for the offerees in all takeover offers made under the Code. In every case a report requested by the independent directors of the target company under rule 21 of the Code is required to accompany the target company statement. In some cases, where full or partial offers have been made and there is more than one class of equity security (full offers) or more than one class of voting security (partial offers) an additional report under rule 22 of the Code is required (obtained at the request of the offeror) to certify the fairness of the consideration being offered for different classes of shares.

We make some observations about the requirements of these various reports in the next section of this paper. In all cases we recommend that the adviser ensures it has a thorough knowledge of how the relevant rules of the Code work.

Rule 22 Report - on the fairness between classes of a takeover offer

Under rule 22 of the Code:

(1)	An offeror must obtain a report from an independent adviser if any of rules 8(3) and (4) and 9(5) apply.
(2)	In the report, the independent adviser must certify that, in the adviser's opinion, the offer complies with the relevant rule specified in subclause (1).
(3)	If an independent adviser's report is obtained, the offer is deemed to comply with the relevant rule specified in subclause (1).

Rule 8 of the Code states that where a person is making a full offer for all the voting securities of a company it must also make an offer for all the other classes of equity securities of the company. That offer must be "fair and reasonable" as between the various classes of equity securities ¹ . In order to ensure that the offer satisfies this requirement an independent adviser is required to certify that this is the case. Once the adviser has given this certificate then the offer is deemed to comply with the relevant rule. (Under rule 9 of the Code, dealing with partial offers, if there is more than one class of voting securities similar provisions apply.)

A rule 22 report is probably the narrowest of all in scope. It is not a report on the merits of the offer, but only on the relativity between the offers being made for each class of equity securities. It is likely to be quite technical in nature, starting with the consideration being offered for the target company's primary securities, and then assessing the relationship between that price and the value of the consideration being offered for other classes of equity security.

Issues that might arise in the report could include the conversion price that has to be paid to exercise any options or convertible notes in order for them to be converted into voting securities, and the period the options or conversion rights have to run.

Even if options are apparently worthless, because their exercise price exceeds current market value, the offeror under a full offer must still offer to purchase such securities. An assessment of the fairness of the price offered might include an assessment of the likelihood of the options having positive value in the future.

Rule 21 report - on the merits of a takeover offer

Rule 21 of the Code states:

The directors of a target company must obtain a report from an independent adviser on the merits of an offer

Full offers

At its simplest an independent adviser's report on a full takeover offer may be a valuation exercise comparing the consideration being offered by the offeror or bidder against various measures of the value of the target company. Questions the adviser could address, among others, include:

(a)	If a cash offer, is it worth more to the target company shareholder to stay in the company or to realise his or her investment for the price offered?
(b)	If the offer is a scrip offer, what is the value and the prospects of the company whose shares are being offered, against the value and the prospects of the target company?
(c)	Is it appropriate to include a premium for control? Does the offeror already have control?

In preparing its report, particularly one involving a valuation, it is likely that an important issue for the adviser in making its valuation would be the reliance it should place on the forecast financial information available from the target company. This in turn could have a significant bearing on the quality of its final report. Issues that the adviser may need to consider could include, among others:

(a)	Should the adviser rely on forecasts of future financial performance prepared by the target company without question?
(b)	Should the adviser carry out its own "reasonableness tests" of prospective financial information provided by the target company before using that information in its valuation and report?
(c)	Should the adviser prepare its own financial forecasts for the target company based on its own analysis (but using source data from the target company)?
(d)	The time period over which any prospective financial information available from the company extends. Could the adviser request the company to prepare prospective financial information extending beyond the next financial year?

The adviser may need to consider the position of the offerees if they opt not to accept the offer. These comments could cover, among others, matters such as:

(a)	If the offer is conditional on the offer reaching 90%, can this condition be waived at the discretion of the bidder?
(b)	What are the prospects of the consideration under the offer being increased if acceptances are coming in at a low level?
(c)	If the offer falls short of 90% acceptance, and/or the offeror waives any 90% condition that may have been part of the offer, where would this leave the minority shareholder? (i) Could they be left as part of a small minority of shareholders, with an illiquid stock? (ii) What are the offeror's plans for the target company once it has control, but there remain minority shareholders? Should these plans add value to the company? (iii) How does the offeror propose to deal with conflicts of interest if it is an existing competitor of the target company and that company remains with minority shareholders?