Guidance Note to assist Independent Advisers
Published 1 April 2003
The Takeovers Panel believes that independent advisers have a pivotal role in the Takeovers Code regime. The report of an independent adviser should provide offerees and voting shareholders with comprehensive, independent advice on the matter they have to decide.
The Panel monitors the performance of independent advisers in meeting their responsibilities. On some occasions this performance has been disappointing.
The Panel has prepared a Guidance Note about the role of independent advisers. The matter of most concern to the Panel is that independent advisers have not always informed shareholders of the protections and rights available to them under the Code or of the options available to, or denied to, the acquirer/bidder as a result of the Code.
The Guidance Note is available on the Panel’s website www.takeovers.govt.nz or in hard copy from the Panel’s offices, phone (04) 471 4618.
The Panel’s view – independent advisers
The independent adviser is critical to the effectiveness of the Code in regulating the market for the control of companies. The independent adviser helps ensure that there are well-informed shareholders wherever a takeover offer is made or another transaction is occurring that requires shareholder approval under the Code. The Panel takes a close interest in the skills as well as the independence of any company or individual proposed for appointment as an independent adviser.
Some advisers have not fully appreciated the philosophy of the Code, the rights it creates for shareholders, and/or the important role of the voting or offeree shareholders in the process. The Panel considers some advisers need to improve the balance and quality of their reports.
Advisers should not assume that because they have been approved as an independent adviser in the past, that they will necessarily be approved again. This will depend to a significant extent on how they fulfill their responsibilities under the Code.
The Panel will continue to monitor independent advisers’ reports and comment on these where it considers this necessary. The quality of previous reports will be taken into account when approving new appointments. However, no adviser previously approved by the Panel would subsequently be considered unsuitable for appointment without the opportunity to make submissions to the Panel.
The Panel’s view – Directors
The independent directors of the target or allotting company also have important responsibilities in the process of independent adviser reports. From some of the reports it has seen, the Panel believes that not all independent company directors appreciate the extent of those responsibilities.
Directors need to ensure that the appointed adviser is given all the information necessary to provide a comprehensive report. They should, in the course of reviewing the independent adviser’s draft report, satisfy themselves that it is sufficiently comprehensive and covers all the relevant issues.
Aims of the Guidance Note
The Guidance Note is to assist independent advisers approved by the Panel to prepare a report under rules 18, 21 or 22 of the Code or under a class exemption or specific exemption granted by the Panel.
The Guidance Note is an aide memoire. It is not a prescription by the Panel on the matters an independent adviser must address in any report prepared for the purposes of the Code. It should not be regarded as definitive and may be amended by the Panel from time to time.
The adviser is required to assess 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).
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. However, in its Guidance Note, the Panel makes suggestions in relation to most of the types of report that an adviser may be called on to complete.
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.
The merits of incremental changes in voting control are often the primary focus of an independent adviser’s report. These issues may have particular relevance in changes of control in the 20% to 50% zone. This was recognised as a critical area when the Code was formulated.
Independent Adviser Reports on Shareholder Acquisitions
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.
These acquisitions can be approved by a meeting of shareholders under rule 7(c) of the Code, and by allotments by Code companies approved by shareholders under rule 7(d) of the Code.
Under these rules, and also under the terms of some analogous Panel exemptions, an independent adviser’s report on the merits of the acquisition or allotment is required to be provided to the voting shareholders.
In each case the non-associated shareholders are given a special right to approve or reject proposals for another shareholder to increase its control percentage of the Code company. The Panel believes that relevant shareholders should exercise this right with care and on the basis of good advice.
It is an important part of the adviser’s role to ensure that shareholders clearly understand their rights under the Code.
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. Continuing the status quo may well be the more desirable outcome for shareholders unless there are good reasons why they should vote to approve a departure from it.
The Panel has been concerned that some independent adviser reports have not fully addressed important elements of the proposals being considered.
Independence is important
In all cases the adviser must be independent. The directors of the target company, the offeror, the acquirer, the seller, the allottee or the allotter should not influence the findings of the independent adviser.
The Panel takes its responsibilities for approving the appointment of independent advisers very seriously.
Under the Code, the Panel’s approval of an adviser’s appointment and the preparation of the adviser’s report often have to be undertaken within very tight time periods. The implications of this are:
- applications to the Panel for approval as an independent adviser must be complete in all respects. The Panel’s policy for the approval of independent advisers is set out on its website at takeovers.govt.nz;
- the adviser must have the resources available to complete all the work needed to finalise its report in the required time;
- the target or subject company itself must have the information and personnel available to provide the independent adviser with the information needed to complete its report, and have the resources to respond to the report.
The tight timeframes set by the Code (at least for takeover offers) create a tension between providing a report comprehensive enough for target company shareholders to be well-informed, while giving the target company directors time to fully consider the report.
This shows how important it is for the adviser and the target company to have sufficient resources to fulfil their responsibilities and deal with any issues.
Since the Takeovers Code came into force in July 2001 the Panel has approved the appointment of some 59 companies, firms or individuals as independent advisers to prepare reports for the purposes of the Code.
We would like your comments.
The Panel is interested in feedback from independent advisers on its Guidance Note and plans to meet with advisers later this year to canvass the issues.