Independent Expert Reports

When an Independent Expert Report Is Required

Section 611 item 7 — Shareholder-Approved Acquisitions

Section 606 prohibits a person from acquiring a relevant interest in the voting shares of a listed or widely-held company where the acquisition takes their voting power above 20%, or from a starting point above 20% and below 90% to a higher figure. The takeovers rules exist so that control passes in an orderly way with equal opportunity for all holders.

Item 7 of section 611 provides an exception where the acquisition is approved by a resolution of shareholders, with no votes cast by the acquirer or its associates. For that approval to be informed, the notice of meeting must include all information known to the acquirer and the target that is material to the decision.

In practice, ASIC’s position in RG 74 is that non-associated shareholders should be given either an independent expert report, or a directors’ statement with detailed reasons, on whether the proposed acquisition is fair and reasonable. An independent expert report is the standard approach, and effectively expected where the directors have any interest in the outcome.

Section 640 — Takeover Bids

Where a takeover bid is made, section 640 requires the target’s statement to include an independent expert report where:

• The bidder’s voting power in the target is 30% or more, or
• The bidder and the target have a common director

The report must state whether the expert considers the offer fair and reasonable, and give reasons. Where those thresholds are not met, the directors must still give a recommendation with reasons, and many boards commission an expert report voluntarily to support it.

Schemes of Arrangement — Part 5.1

For a members’ scheme of arrangement, the scheme booklet must be registered with ASIC and contain the information prescribed by the Corporations Regulations, including an independent expert report where the acquirer holds an interest of 30% or more or there is a common director, and in practice for most control schemes regardless.

For a scheme, the expert opines on whether the scheme is in the best interests of members — a different formulation from the takeover test, which matters in how the analysis is structured.

Other Circumstances

Independent expert reports are also commonly required or expected for:

• Related party transactions by listed entities requiring shareholder approval under ASX Listing Rule 10.1
• Selective capital reductions and share buy-backs where the terms may not treat holders equally
• Compulsory acquisitions following a bid, where the expert opines on whether the consideration is fair value
• Article and constitutional changes affecting class rights
• Demergers and in-specie distributions

RG 111 — The Analytical Framework

Regulatory Guide 111 is the operative guidance on how an expert must reach a conclusion. Its central structure is the separation of “fair” from “reasonable”.

“Fair” — A Value Comparison

An offer is fair if the value of the consideration offered is equal to or greater than the value of the securities being acquired.

Two points define this test:

Control basis on one side. The value of the target’s securities is assessed on a control basis — including the full value of the entity, with the synergies and premium available to a controlling holder — even though the individual shareholder holds a non-controlling parcel. RG 111 is explicit that comparing a portfolio-basis target value with the offer price understates the target and is not the test.

Minority basis on the other, where scrip is offered. Where consideration includes scrip in the bidder, the value of that scrip is assessed on a minority or portfolio basis, since that is what the target shareholder actually receives.

The asymmetry is deliberate and it is the reason many scrip-for-scrip transactions are assessed as not fair, but reasonable.

“Reasonable” — Everything Else

An offer is reasonable if it is fair. It may also be reasonable despite being not fair, where there are sufficient other considerations. RG 111 identifies factors including:

• The bidder’s existing shareholding and practical level of control
• Any significant shareholding blocks other than the bidder’s
• The liquidity of the target’s securities and the likelihood of an alternative offer
• The consequences of the offer not proceeding, including the target’s financial position and funding requirements
• The likely market price of the securities if the offer lapses
• Any special value of the target to the bidder not available to others
• The value to an alternative bidder and the prospects of a competing proposal

A “not fair but reasonable” conclusion is a legitimate and reasonably common outcome. It requires the report to set out clearly why the other considerations outweigh the value shortfall — which is where a report either persuades or does not.

“In the Best Interests of Members” — The Scheme Test

For a scheme of arrangement, RG 111 directs the expert to reach a view on whether the scheme is in the best interests of members. Where the scheme is a control transaction, the expert should analyse it as if it were a takeover bid — applying the fair and reasonable analysis — and conclude that it is in the best interests of members if it is either fair and reasonable, or not fair but reasonable.

Where the scheme is not a control transaction, the expert weighs the advantages and disadvantages against the alternatives, including the status quo.

Valuation Approach Requirements

RG 111 expects the expert to apply methodologies appropriate to the entity and the transaction, and to explain the selection:

Discounted cash flow — Appropriate where reliable forecasts are available. The report must disclose the key assumptions, the discount rate and its derivation, terminal value assumptions, and sensitivity analysis.

Capitalisation of earnings — Applying multiples derived from comparable listed companies and comparable transactions to a maintainable earnings figure, with the normalisation adjustments explained.

Net assets or realisable value — For asset-holding entities, entities in wind-down, or as a cross-check.

Quoted market price — For listed targets, the market price is relevant evidence, but it reflects portfolio value rather than control value. RG 111 expects the expert to address the difference and to consider whether the market for the securities is sufficiently liquid and informed for the price to be meaningful.

Control premium — Where the expert moves from a portfolio basis to a control basis, the premium applied must be supported by evidence, typically from observed premiums in comparable Australian transactions, rather than a conventional percentage applied without derivation.

A valuation range, not a point estimate — RG 111 expects the expert to express a range and to state where within the range the offer falls.

RG 112 — Independence

Regulatory Guide 112 governs the expert’s independence, and it is applied strictly. An expert must be, and be seen to be, independent of the parties and the transaction.

What Compromises Independence

Financial interests — Any shareholding, option or other interest in either party, held by the expert firm, its partners or the individuals involved.

Fee structure — The fee must not be contingent on the outcome of the transaction or on the conclusion reached. A success fee, or a fee payable only if the transaction completes, is disqualifying.

Prior involvement in the transaction — The expert must not have advised on the structuring, negotiation or pricing of the transaction. This is the most common practical disqualifier: the firm that advised the board on the deal cannot then write the independent report on it.

Prior and concurrent relationships — Recent audit, advisory or valuation engagements for either party require assessment and disclosure. Long-standing relationships that create a perception of alignment can be disqualifying even where no financial interest exists.

Business relationships and referral arrangements — Including arrangements with the parties’ advisers.

What the Report Must Disclose

RG 112 requires the report to state the expert’s qualifications and relevant experience, the basis and amount of the fee, any relationship with the parties in the preceding two years, any interest in the outcome, who instructed the expert and who is paying, and a declaration of independence.

The expert must also confirm they have had access to all information reasonably required and identify any material limitation on the work performed. An expert who has been denied access to information material to the conclusion must say so in the report.

Who Appoints the Expert

The expert should be appointed by the party that must provide the report to shareholders — in a takeover, the target’s directors; in a section 611 approval, typically the non-associated directors or an independent board committee. Appointment by the acquirer, or by a party with an interest in the conclusion, undermines the report regardless of how the work is performed.

What Goes Wrong

• Fair test applied on a portfolio basis, comparing the offer to an undiscounted market or minority value rather than a control value
• Control premium asserted without evidence, or a conventional percentage applied with no derivation from comparable transactions
• “Not fair but reasonable” concluded without adequate reasoning, leaving shareholders unable to assess why the other considerations outweigh the shortfall
• Scrip consideration valued on a control basis, overstating what the target shareholder receives
• A point estimate instead of a range, or a range so wide it conveys nothing
• Undisclosed prior involvement in advising on the transaction
• Forecasts adopted without assessment — management forecasts used as inputs without the expert forming and disclosing a view on their reasonableness
• Special value to the bidder not addressed, where synergies available only to that acquirer are material to the assessment
• Information limitations not disclosed, where access to material information was restricted
• Late engagement, leaving insufficient time for the work and for ASIC’s review of the document

The Timetable

Independent expert reports sit on the critical path of a transaction, and the timetable is unforgiving.

For a scheme of arrangement, the booklet including the expert’s report must be lodged with ASIC before the first court hearing, and ASIC has a statutory period to consider it. For a takeover, the target’s statement including the report must be given within the prescribed period after the bidder’s statement. In both cases, ASIC comments on the expert’s report are a common cause of delay, and a report that requires substantive revision after lodgement can move the meeting date.

Engagement well before lodgement is therefore not a preference but a practical requirement. The valuation work itself takes time; the interaction with the company’s forecasts, the assessment of their reasonableness, and the sensitivity analysis all take longer where the expert is engaged late and working against the timetable.

The Valuation Work Behind an Independent Expert Report

Whether or not a firm holds the licence to sign the report itself, the substance of an independent expert report is a valuation exercise, and it is the valuation that determines whether the conclusion holds.

Control-basis enterprise and equity valuation — Applying DCF, capitalisation of earnings, and asset-based approaches as appropriate, expressed as a range, with the methodology selection reasoned rather than asserted.

Comparable company and transaction analysis — Trading multiples from genuinely comparable listed peers and multiples implied by comparable Australian transactions, with the comparability of each explained rather than a list presented without commentary.

Control premium derivation — From observed premiums in comparable transactions in the same market, sized to the specific circumstances rather than applied as a convention.

Assessment of forecasts — Reviewing management’s projections against historical performance, industry conditions and the entity’s forecasting record, and forming a disclosable view on their reasonableness.

Scrip valuation on the correct basis — Where the consideration includes securities in the acquirer, valued on a minority basis, including where the acquirer is itself unlisted.

Sensitivity and scenario analysis — Showing how the conclusion moves with the key assumptions, which is both an RG 111 expectation and the part shareholders can actually use.

Special value and synergies — Identifying value available only to the specific acquirer, and addressing how it bears on the assessment.

Documentation to withstand review — Every assumption sourced, every judgement explained, structured for ASIC’s review of the document and for scrutiny in a contested transaction.

InteleK’s accredited valuation specialists work alongside transaction counsel, corporate advisers and, where required, the licensed expert — providing the valuation analysis that independent expert conclusions rest on.