ASIC RG 111 — ASIC Regulatory Guide – RG 111 Content of expert reports

Page 1 REGULATORY GUIDE 111 Content of expert reports October 2020 About this guide This is a guide for any person who commissions, issues or uses an expert report. It provides guidance on the content of an expert report and how an expert can help security holders make informed decisions about transactions. Page 2 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This version was issued in October 2020 and is based on legislation and regulations as at the date of issue. Previous versions:  Superseded Regulatory Guide 111, issued October 2007, reissued March 2011 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 3 Contents A Overview ........................................................................................... 4 Reports covered by this guide ........................................................... 4 B Analysing a transaction .................................................................. 7 A recommended approach ................................................................ 7 Control transactions ........................................................................... 8 Demergers and demutualisations .................................................... 13 Approval of a sale of securities under item 7 of s611 ...................... 14 Compulsory acquisitions and buy-outs ............................................ 15 Related party transactions ............................................................... 16 Transfer of shares under s444GA ................................................... 18 C Methodologies and assumptions ................................................. 21 Choice of methodology .................................................................... 21 Assumptions .................................................................................... 23 Value ranges .................................................................................... 24 Valuing assets ................................................................................. 24 D Other key requirements ................................................................ 25 Clear, concise and effective communication ................................... 25 Statements should be supportable .................................................. 27 Changes in circumstances............................................................... 30 Inclusion of other information........................................................... 30 Expertise .......................................................................................... 32 Working papers ................................................................................ 33 E Regulatory action .......................................................................... 35 Key terms ............................................................................................... 36 Related information ............................................................................... 38 Page 4 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 4 A Overview Key points This guide gives ASIC’s views on how an expert can help security holders make informed decisions about transactions. It gives guidance to experts on how to draft an expert report that satisfies the requirements of the Corporations Act 2001 (Corporations Act). This guide outlines our views on: • how experts should analyse a proposed transaction (see Section B); • the different valuation methodologies used by experts and the treatment of assumptions (see Section C); • general requirements for all expert reports (see Section D); and • the regulatory action we might take against an expert (see Section E). Reports covered by this guide RG 111.1 This guide focuses on reports prepared for transactions under Chs 2E, 5, 6 and 6A of the Corporations Act, whether the reports are required by the Corporations Act or are commissioned voluntarily. The principles in this guide may also be relevant to independent expert reports commissioned for other purposes—for example, specialist reports like geologist reports or traffic forecast reports for inclusion in Ch 6D disclosure documents and Ch 7 product disclosure statements. RG 111.2 This guide does not apply to independent or investigating accountant reports. RG 111.3 Examples of transactions for which entities are required to commission an independent expert report or may do so voluntarily to assist security holders to make an informed choice are takeover bids, compulsory acquisitions and buy-outs, schemes of arrangement, related party transactions and capital reorganisations: see Table 1. RG 111.4 Where the Corporations Act or Australian Securities Exchange Limited (ASX) Listing Rules require an entity to commission an independent expert report, this is generally to ensure that shareholders receive an independent analysis of transactions involving related parties or other persons of influence. For example, s640 of the Corporations Act requires an independent expert report where the bidder has a 30% voting power in the target company or the bidder and target have common directors. It is important that an expert applies close scrutiny to a transaction involving a related party or other person of influence and critically analyses the information provided to it. Page 5 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 5 Table 1: Examples of transactions for which entities commission an independent expert report Transaction Circumstances Takeover bids  The target must commission an expert report when the bidder’s voting power in the target is at least 30% of the target or when the bidder and the target have common directors: s640.  The bidder must commission an expert report when the consideration paid by the bidder for acquiring a pre-bid stake includes unquoted securities: s636(1)(h)(iii) and 636(2).  Targets often commission expert reports to assist security holders, even if there is no requirement to do so.  In joint bids the bidders must use their best endeavours to have the target engage an independent expert to prepare a report on whether the joint bid is fair and reasonable to target shareholders who are not associates of the bidders: see Table 9 in Regulatory Guide 9 Takeover bids (RG 9) and RG 9.649. Schemes of arrangement  The scheme company must commission an expert report when the other party to the scheme holds at least 30% of the voting shares of the scheme company or when they have common directors: reg 5.1.01 and Sch 8, cls 8303 and 8306 of the Corporations Regulations 2001 (Corporations Regulations).  Scheme companies often commission an expert report when transactions are complex or effect a takeover. Compulsory acquisitions or buy-outs The bidder in a compulsory acquisition must commission an expert report under s663B, 664C, 665B and 667A. Acquisitions approved by security holders under item 7 of s611 The company commissions an expert report (or, if it has the expertise, a director’s report to the same standard) to discharge the requirement to disclose all material information on how to vote on the resolution: item 7(b) of s611. Selective capital reductions An expert report should usually accompany the explanatory memorandum to satisfy the information requirements of fairness under s256C(4). Related party transactions An expert report may be supplied to members as part of the material to accompany the notice of meeting: s218, 219, 220 and 221. Transactions with persons in a position of influence Notices of meeting for approvals under ASX Listing Rule 10.10 must be accompanied by an expert report: ASX Listing Rule 10.10.2. Demutualisations of financial institutions An expert report must accompany a notice of meeting for a demutualisation of a financial institution or friendly society: Sch 4, cl 29(4). Buy-backs If a company proposes to buy-back a significant percentage of securities or the holdings of a major shareholder, it should consider providing an independent expert report with a valuation of the shares: Regulatory Guide 110 Share buy-backs (RG 110) at RG 110.18 and RG 110.20. Page 6 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 6 Transaction Circumstances Share transfers under s444GA Share transfers under s444GA that require relief from s606 will generally require an expert report to help:  ASIC in determining whether to grant relief from s606;  members, creditors, interested persons and ASIC in their decision to oppose leave of the court; and  the court in its decision to grant leave. Page 7 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 7 B Analysing a transaction Key points An expert should focus on the issues facing the security holders for whom the report is being prepared: see RG 111.5–RG 111.7. An expert should focus on the substance of the transaction rather than the legal mechanism used to achieve that purpose: see RG 111.8–RG 111.34. Some transactions will require a different form of analysis, particularly: • demergers and demutualisations (see RG 111.35–RG 111.40); • approval of a sale of securities under item 7 of s611 (see RG 111.41– RG 111.46); • compulsory acquisitions and buyouts (see RG 111.47–RG 111.51); and • share transfers under s444GA (see RG 111.64–RG 111.80). When assessing whether a related party transaction is ‘fair and reasonable’, an expert should consider the overall effect of the transaction: see RG 111.53–RG 111.63. A recommended approach RG 111.5 In deciding on the appropriate form of analysis for a report, an expert should bear in mind that the main purpose of the report is to adequately deal with the concerns that could reasonably be anticipated of those persons affected by the proposed transaction. An expert should focus on the purpose and outcome of the transaction, that is, the substance of the transaction, rather than the legal mechanism used to effect the transaction. RG 111.6 The Corporations Act requires an expert to express the opinion using particular language depending on the type of transaction. For example: (a) whether a takeover bid is ‘fair and reasonable’ under s640; (b) whether a scheme of arrangement is in ‘the best interests of the members of the company’ under Sch 8, cl 8303 of the Corporations Regulations; and (c) whether the proposed terms in the buy-out or acquisition notice give a ‘fair value’ for the securities under s667A(1). RG 111.7 Nevertheless, the form of analysis an expert uses to evaluate a transaction should address the issues faced by security holders. The rest of this section sets out our guidance on the form of analysis an expert should use for particular types of transactions. Page 8 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 8 Control transactions RG 111.8 A control transaction, when a person acquires, or increases, a controlling stake in a company, can be achieved by way of a number of different legal mechanisms, including, for example: (a) a takeover bid under Ch 6; (b) a scheme of arrangement under Pt 5.1; (c) approval of an issue of shares using item 7 of s611; and (d) a selective capital reduction or selective buy-back under Ch 2J. Note 1: Ch 6 extends to listed managed investment schemes and listed bodies that are not companies. For the purposes of this regulatory guide, references to a ‘company’ in the context of Ch 6 takeovers can be read as references to these bodies or schemes, when appropriate. Note 2: Not all transactions under item 7 of s611 involve the issue of shares. For those transactions that do not involve the issue of shares, see RG 111.41–RG 111.46. RG 111.9 It is important for an expert to focus on the substance of a control transaction, rather than the legal mechanism used to effect it. Takeover bids RG 111.10 It has long been accepted in Australian mergers and acquisitions practice that the words ‘fair and reasonable’ in s640 establish two distinct criteria for an expert analysing a control transaction: (a) is the offer ‘fair’; and (b) is it ‘reasonable’? That is, ‘fair and reasonable’ is not regarded as a compound phrase. RG 111.11 Under this convention, an offer is ‘fair’ if the value of the offer price or consideration is equal to or greater than the value of the securities the subject of the offer. This comparison should be made: (a) assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm’s length; and Note: Any special value of the ‘target’ to a particular ‘bidder’ (e.g. synergies that are not available to other bidders) should not be taken into account under this comparison, but see RG 111.13(e). (b) assuming 100% ownership of the ‘target’ and irrespective of whether the consideration is scrip or cash. The expert should not consider the percentage holding of the ‘bidder’ or its associates in the target when making this comparison. For example, in valuing securities in the target entity, it is inappropriate to apply a discount on the basis that the shares being acquired represent a minority or ‘portfolio’ parcel of shares. Page 9 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 9 RG 111.12 An offer is ‘reasonable’ if it is fair. It might also be ‘reasonable’ if, despite being ‘not fair’, the expert believes that there are sufficient reasons for security holders to accept the offer in the absence of any higher bid before the close of the offer. RG 111.13 When deciding whether an offer is reasonable, an expert might consider: (a) the bidder’s pre-existing voting power in securities in the target; (b) other significant security holding blocks in the target; (c) the liquidity of the market in the target’s securities; (d) taxation losses, cash flow or other benefits through achieving 100% ownership of the target; (e) any special value of the target to the bidder, such as particular technology, the potential to write off outstanding loans from the target, etc; (f) the likely market price if the offer is unsuccessful; and (g) the value to an alternative bidder and likelihood of an alternative offer being made RG 111.14 For example, a bidder who controls a target and makes a takeover bid may offer a price which is ‘not fair’ as it includes a minority discount. The offer price may, however, be greater than the price at which the securities were trading before the takeover bid was made. In such circumstances, it is appropriate for the expert to consider whether the market price may fall if the offer is unsuccessful: see RG 111.13(f). It would also be appropriate for the expert to consider the matters set out in RG 111.13(d) and RG 111.13(f) in assessing the likelihood that the bidder would increase its offer price, including to a price that an expert would assess as ‘fair’. RG 111.15 A bidder may also offer a price which is ‘not fair’ where the target is in financial distress. This is because the fair value of the target securities should be determined on the basis of a knowledgeable and willing, but not anxious, seller that is able to consider alternative options to the bid (e.g. an orderly realisation of the target’s assets). Such an offer may nonetheless be reasonable if the alternative methods of remedying the financial distress are likely to be less attractive to security holders than a successful offer. Note: For the avoidance of doubt, funding requirements for a target that is not in financial distress (e.g. capital that is required to develop a project) should generally be taken into account when determining the fair value of target securities: see Northern Energy Corporation Limited [2011] ATP 2. Such funding requirements will generally be relevant to determining the value of the target securities assuming knowledgeable and willing, but not anxious, parties. These funding requirements will often be implicitly reflected in certain methodologies (e.g. the quoted price for listed securities). The expert may need to expressly determine to take funding requirements into account when using other methodologies (e.g. the discounted cash flow methodology). Page 10 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 10 RG 111.16 An expert concluding that an offer is not fair, but reasonable, should clearly explain the meaning of this opinion, why the expert has reached this conclusion and the significance of the conclusion to the decision to be made by security holders (e.g. what it might mean for the security holder’s decision making). Otherwise, depending on the circumstances, the report might be misleading or deceptive. In describing the factors that are relevant to a conclusion that an offer is reasonable, an expert should generally only include the factors that are material to this conclusion. RG 111.17 To the extent reasonably practicable, and where it can do so with sufficient precision to assist security holders, the expert should quantify the reasonableness factors it considers to be material. For example: (a) if the expert comments that the share price may fall if the bid is unsuccessful, the expert should consider providing quantitative information such as the pre-announcement share price (or volume weighted average price) and the liquidity profile of the target’s shares; and (b) if the bidder controls the target, the expert should consider quantifying the size of the minority discount. Control transactions by way of a scheme of arrangement RG 111.18 Schemes of arrangement can be used as an alternative to a Ch 6 takeover bid to achieve substantially the same outcome. In these circumstances, we expect the form of analysis to be substantially the same as for a takeover bid, even though the wording of the opinion will also be whether the proposed scheme is ‘in the best interests of the members of the company’. This reflects that the legislative test for schemes of arrangement differs from that applicable to a Ch 6 takeover bid. RG 111.19 When an expert report is required in a scheme of arrangement involving a change of control, the expert is expected to apply the analysis and provide an opinion as to whether the proposal is ‘fair and reasonable’ as set out in RG 111.10–RG 111.17 as if: (a) the ‘bidder’ was the ‘other party’; and (b) the ‘target’ was the company that is the subject of the proposed scheme. RG 111.20 If an expert would conclude that a proposal was ‘fair and reasonable’ if it was in the form of a takeover bid, it will also be able to conclude that the scheme is in the best interests of the members of the company. RG 111.21 If an expert would conclude that the proposal was ‘not fair but reasonable’ if it was in the form of a takeover bid using the analysis described in RG 111.10–RG 111.17, it is still open to the expert to also conclude that the scheme is ‘in the best interests of the members of the company’. The expert Page 11 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 11 should clearly say that the consideration is not equal to or greater than the value of the securities the subject of the scheme, but there are sufficient reasons for security holders to vote in favour of the scheme in the absence of a higher offer. RG 111.22 If an expert concludes that a scheme proposal is ‘not fair and not reasonable’, then the expert would conclude that the scheme is not in the best interests of the members of the company. RG 111.23 When a scheme of arrangement is used to acquire or increase a party’s control, the report should address the interests of members who are bound to give up rights under the scheme. The expert should separately consider the interests of each class of those members under the scheme. Other control transactions RG 111.24 An issue of shares by a company otherwise prohibited under s606 may be approved under item 7 of s611 and the effect on the company’s shareholding is comparable to a takeover bid. Examples of such issues approved under item 7 of s611 that are comparable to takeover bids under Ch 6 include: (a) a company issues securities to the vendor of another entity or to the vendor of a business and, as a consequence, the vendor acquires over 20% of the company incorporating the merged businesses. The vendor could have achieved the same or a similar outcome by launching a scrip takeover for the company; and (b) a company issues securities in exchange for cash and, as a consequence, the allottee acquires over 20% of the company. The allottee could have achieved the same or a similar outcome by using a cash-rich entity to make a scrip takeover bid for the company. RG 111.25 If this is the case, an expert should apply the analysis outlined in RG 111.10–RG 111.17 —that is, the transaction should be analysed as if it was a takeover bid under Ch 6. However, references to, for example, the ‘bidder’ and the ‘target’ should be taken to mean the ‘allottee’ and ‘company’ respectively. RG 111.26 An issue of shares for cash may have other benefits that should be considered in deciding whether the transaction is reasonable. These benefits may include: (a) the provision of new capital to exploit business opportunities; (b) a reduction in debt and interest payments; or (c) a needed injection of working capital. RG 111.27 There may be circumstances in which the allottee will acquire 20% or more of the voting power of the securities in the company following the allotment Page 12 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 12 or increase an existing holding of 20% or more, but does not obtain a practical measure of control or increase its practical control over that company. If the expert believes that the allottee has not obtained or increased its control over the company as a practical matter, then the expert could take this outcome into account in assessing whether the issue price is ‘reasonable’ if it has assessed the issue price as being ‘not fair’ applying the test in RG 111.11. RG 111.28 A transaction otherwise prohibited under s606 for which approval is sought under item 7 of s611 will not always involve the issue of shares. For the analysis of other transactions under item 7 of s611, see RG 111.41– RG 111.46. RG 111.29 Similar considerations apply in relation to control transactions by way of a selective capital reduction or selective buy-back under Ch 2J. Assessing non-cash consideration in control transactions RG 111.30 If the bidder is offering non-cash consideration in a control transaction, the expert should examine the value of that consideration and compare it with the valuation of the target’s securities, whether the transaction is effected by a takeover bid, a scheme of arrangement or an issue of shares. RG 111.31 The comparison should be made between the value of the securities being offered (allowing for a minority discount) and the value of the target entity’s securities, assuming 100% of the securities are available for sale. This comparison reflects the fact that: (a) the acquirer is obtaining or increasing control of the target; and (b) the security holders in the target will be receiving scrip constituting minority interests in the combined entity. However, the expert may need to assess whether a scrip takeover is in effect a merger of entities of equivalent value when control of the merged entity will be shared equally between the ‘bidder’ and the ‘target’. In this case, the expert may be justified in using an equivalent approach to valuing the securities of the ‘bidder’ and the ‘target’. RG 111.32 If the expert uses the market price of securities as a measure of the value of the offered consideration, the expert should consider and comment on: (a) the depth of the market for those securities; (b) the volatility of the market price; and (c) whether or not the market value is likely to represent the value if the takeover bid is successful. Page 13 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 13 RG 111.33 For example, trading after a bid is announced may reflect some of the benefits of the combined entity, depending on whether the market has confidence that the transaction will proceed. RG 111.34 If, in a scrip bid, the target is likely to become a controlled entity of the bidder, the bidder’s securities can also be valued assuming a notionally combined entity. However, the expert should still allow for the fact that accepting holders are likely to hold minority interests in that combined entity. The comparison should include the assets and liabilities of the target and the dilution effect of the acquisition on the target’s earnings, asset backing and dividends. The expert should also discuss the bases for calculating the dilutions. Note: Reverse takeovers (either by takeover bid or scheme of arrangement) can raise special issues: see Regulatory Guide 60 Schemes of arrangement (RG 60) at RG 60.35– RG 60.37. Demergers and demutualisations RG 111.35 Demergers and demutualisations might not involve: (a) a change in the underlying economic interests of security holders; (b) a change of control; or (c) selective treatment of different security holders. RG 111.36 In the absence of these factors, the issue of ‘value’ may be of secondary importance (particularly in demutualisations). The expert should provide an opinion as to whether the advantages of the transaction outweigh the disadvantages. In some cases, it might still be appropriate to carry out a valuation. In a demerger, the expert may still choose to value the demerged businesses to test whether the value of the sum of the parts (the demerged entities) is greater or less than the whole (the existing entity). If the expert does not undertake such a valuation, to the extent reasonably practicable, and where it can do so with sufficient precision to assist security holders, the expert should quantify the advantages and disadvantages that it considers to be material. For example, the expert may comment on the likelihood of a ‘market re-rating’ by analysing the post-transaction performance of other de- mergers. RG 111.37 If the demerger or demutualisation involves a scheme of arrangement and the expert concludes that the advantages of the transaction outweigh the disadvantages, the expert should say that the scheme is in the best interests of the members. RG 111.38 In a demerger, security holders will typically have to balance issues such as the benefits of a greater focus afforded to the demerged entities against increased costs and reduction in diversified earnings streams. Page 14 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 14 RG 111.39 In a demutualisation, the advantages and disadvantages to be considered might include questions of unlocking value for members and greater management accountability as reasons to demutualise, as compared to the loss of the benefits of being a mutual organisation. RG 111.40 An expert might need to consider whether using the form of analysis described at RG 111.10–RG 111.17 is appropriate when demergers and demutualisations involve one or more of: (a) a change in the underlying economic interests of security holders; (b) a change of control; or (c) selective treatment of different security holders. Approval of a sale of securities under item 7 of s611 RG 111.41 Approval for a sale of securities that would otherwise contravene s606 may be sought under item 7 of s611. Item 7 of s611 envisages that security holders not associated with such a transaction may approve it. In doing so, these security holders may be forgoing: (a) the opportunity of receiving a takeover bid; and (b) sharing in any premium for control. RG 111.42 The expert should identify the advantages and disadvantages of the proposal to security holders not associated with the transaction. In contrast with the analysis for an issue of shares approved under item 7 of s611, the expert should provide an opinion either: (a) that the advantages of the proposal outweigh the disadvantages; or (b) that the disadvantages of the proposal outweigh the advantages. RG 111.43 A specific issue the expert should determine is whether the vendor is to receive a premium for control. RG 111.44 The greater the control premium, the greater the advantages of the transaction to the non-associated holders would need to be to support a finding that the advantages of the proposal outweighed the disadvantages. These other advantages may come, for example, from a better long-term profit outlook as the incoming security holder offers superior management skills. RG 111.45 The expert should also inquire whether further transactions are planned between the entity, the vendor or any of their associates. If any are contemplated, the expert should determine whether those transactions would be on an arm’s length basis. If not, an implication arises that they may compensate a vendor for a price that is too low. RG 111.46 An expert should also consider whether any proposed acquisition by way of sale, if approved, might deter the making of a takeover bid for the entity. Page 15 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 15 Compulsory acquisitions and buy-outs RG 111.47 Chapter 6A prescribes the steps an expert must take in reaching an opinion for compulsory acquisitions and buy-outs. Section 667A(1) requires an expert to: (a) provide an opinion on whether the proposed terms in the buy-out or acquisition notice give a ‘fair value’ for the securities; and (b) set out the reasons for its opinion. RG 111.48 To determine what is ‘fair value’, s667C requires that an expert: (a) first assess the value of the entity as a whole; (b) then allocate that value among the classes of issued securities in the company (taking into account the relative financial risk and the voting and distribution rights of the classes); and (c) then allocate the value of each class pro rata among the securities in that class (without allowing any premium or applying a discount for particular securities or interest in that class). RG 111.49 In determining the fair value for securities, an expert must also take into account the prices paid for securities in that class in the previous six months: s667C(2). RG 111.50 The weight of judicial authority is that an expert should not reflect ‘special value’ that might accrue to the acquirer (e.g. Capricorn Diamonds Investments Pty Ltd v Catto (2002) 41 ACSR 376 at 431; Winpar Holdings Ltd v Austrim Nylex Ltd [2005] VSCA 211 at [11]–[37]; Teh v Ramsay Centauri (2002) 42 ACSR 354 at 359). In practice, the issue of ‘special value’ might not be a critical issue. Special value might not be material once it has been allocated pro rata to each security in the class, including the securities of the party seeking to make the compulsory acquisition. An expert should not add any premium for forcible divestment: see Capricorn at 432. Note: Similar considerations apply as to whether consideration under a capital reduction ‘is fair and reasonable to the company’s shareholders as a whole’: see s256B(1)(a) and Re Goldfields Kalgoorlie; Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 34 ACSR 737 at [69]. RG 111.51 Our approach to nominating experts to provide valuations under Ch 6A is set out in Regulatory Guide 10 Compulsory acquisitions and buyouts (RG 10) at RG 10.173–RG 10.178. Page 16 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 16 Related party transactions RG 111.52 Experts who are asked to prepare a report for the following transactions should comply with RG 111.53–RG 111.63: (a) a transaction with a related party that requires member approval under Ch 2E (including as modified by Pt 5C.7 for registered managed investment schemes); or (b) a transaction with a person in a position of influence that requires member approval under ASX Listing Rule 10. RG 111.53 When analysing related party transactions, it is important that an expert focuses on the substance of the related party transaction, rather than the legal mechanism. For example, where a related party transaction is made up of a number of separate components, the expert should consider the overall effect of the related party transaction. RG 111.54 Where the related party transaction is one component of a broader transaction or a series of transactions involving non-related parties (such as a control transaction), the expert should carefully consider what level of analysis of the related party aspect is required: see also RG 111.4. In this consideration, the expert should bear in mind whether the report has been sought to ensure that members are provided with sufficient information to decide whether to approve giving a financial benefit to the related party as well as the broader transaction. ‘Fair’ and ‘reasonable’ test RG 111.55 Generally, ASIC expects an expert who is asked to analyse a related party transaction to express an opinion on whether the transaction is ‘fair and reasonable’ from the perspective of non-associated members. This analysis is specifically required where the report is also intended to accompany meeting materials for member approval of an asset acquisition or disposal under ASX Listing Rule 10.1. RG 111.56 Where an expert assesses whether a related party transaction is ‘fair and reasonable’ (whether for the purposes of Ch 2E or ASX Listing Rule 10.1), this should not be applied as a composite test—that is, there should be a separate assessment of whether the transaction is ‘fair’ and ‘reasonable’, as in a control transaction. An expert should not assess whether the transaction is ‘fair and reasonable’ based simply on a consideration of the advantages and disadvantages of the proposal, as we do not consider this provides members with sufficient valuation information. See Regulatory Guide 76 Related party transactions (RG 76) at RG 76.105–RG 76.112 for further details. Page 17 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 17 RG 111.57 A proposed related party transaction is ‘fair’ if the value of the financial benefit to be provided by the entity to the related party is equal to or less than the value of the consideration being provided to the entity. This comparison should be made: (a) assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm’s length; and Note: This is a separate test to the consideration of relevant factors and circumstances when determining whether the transaction is on ‘arm’s length’ terms for the purposes of s210: see Section C of RG 76. (b) for control transactions, on the basis referred to in RG 111.11. RG 111.58 Where the proposed transaction consists of an asset acquisition by the entity, it is ‘fair’ if the value of the financial benefit being offered by the entity to the related party is equal to or less than the value of the assets being acquired. Where the financial benefit given by the entity is securities in the entity and the consideration is securities in another entity held by a related party, the value of the entity’s securities should be compared to the value of the securities it is purchasing. If the expert uses the market price of either of the securities as a measure of their value, it should consider, among other things, the factors set out in RG 111.32(a)–RG 111.32(b). RG 111.59 In valuing the financial benefit given and the consideration received by the entity, an expert should take into account all material terms of the proposed transactions. RG 111.60 A proposed related party transaction is ‘reasonable’ if it is ‘fair’. It might also be ‘reasonable’ if, despite being ‘not fair’, the expert believes there are sufficient reasons for members to vote for the proposal. RG 111.61 If an expert concludes that a related party transaction is not fair, but reasonable, it should clearly explain the meaning of this opinion, why the expert has reached this conclusion, and the significance of the conclusion to the decision to be made by security holders (e.g. what it might mean for the security holders’ decision-making): see also RG 111.16–RG 111.17. RG 111.62 When deciding whether a proposed transaction is ‘reasonable’, factors that an expert might consider include: (a) the financial situation and solvency of the entity, including the factors set out in RG 111.26, if the consideration for the financial benefit is cash; (b) opportunity costs; (c) the alternative options available to the entity and the likelihood of those options occurring; (d) the entity’s bargaining position; Page 18 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 18 (e) whether there is selective treatment of any security holder, particularly the related party; (f) any special value of the transaction to the purchaser, such as particular technology or the potential to write off outstanding loans from the target; and (g) the liquidity of the market in the entity’s securities. RG 111.63 Generally an expert need only conduct one analysis of whether the transaction is ‘fair and reasonable’, even if the report has been prepared for a reason other than the transaction being a related party transaction (e.g. if item 7 of s611 approval is also required). Transfer of shares under s444GA RG 111.64 Section 444GA allows shares of a company in administration to be transferred by an administrator as part of a deed of company arrangement (DOCA). The transfer may only occur if shareholders consent or when the court is satisfied that the transfer would not ‘unfairly prejudice’ the interests of shareholders. RG 111.65 Where a transfer under s444GA will result in a person acquiring a relevant interest in voting shares in a company subject to Ch 6 above 20%, relief from s606 must be granted by ASIC. RG 111.66 ASIC generally requires an expert’s report to be prepared for s444GA transactions to assist in determining whether to grant relief from s606. The expert’s report is also included as part of an explanatory statement to: (a) assist members, creditors, interested persons and ASIC in determining whether to oppose the application for leave of the court under s444GA; and (b) provide further evidence to assist the court in its assessment of granting leave under s444GA. Note: Regulatory Guide 6 Takeovers: Exceptions to the general prohibition (RG 6) at RG 6.202(b) provides more information on the requirements for the explanatory statement. RG 111.67 In exceptional circumstances, where a company clearly holds assets of negligible value and/or has no business, there may be limited benefit in providing an expert’s report. In these circumstances, you should approach ASIC early in the process to discuss whether or not an expert’s report is required. RG 111.68 Provided the requirements in RG 6.202(b) are met, ASIC will generally grant relief from s606 where the expert’s report concludes that shareholders’ equity has no residual value. This aligns with the position of the courts when Page 19 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 19 considering whether unfair prejudice exists. The courts consider that the possibility of prejudice to a shareholder only arises if there is some residual equity in the company: see Martin CJ in Weaver v Noble Resources Ltd [2010] WASC 182 and White J in Lewis, In the matter of Diverse Barrel Solutions Pty Ltd (subject to a Deed of Company Arrangement) [2014] FCA 53. RG 111.69 Experts who are asked to prepare a report for share transfers using s444GA should generally comply with RG 111.70–RG 111.80. Form and content of report RG 111.70 An expert’s report should provide an independent opinion of the value, if any, of shareholders’ residual equity. The expert is not required to form a view on the ‘fairness’ or ‘reasonableness’ of the transaction. RG 111.71 Shareholders’ residual equity should be derived by assessing the value of the company’s assets and/or business operations, less borrowings, other liabilities and creditors’ claims. RG 111.72 The value of shareholders’ residual equity should be assessed on the basis that the company is in administration. RG 111.73 Consistent with the approach of the courts, an expert should generally value shareholders’ residual equity in a company under administration on a ‘winding up’ or ‘liquidation’ basis where that is the likely or necessary consequence of the transfer of shares not being approved: see Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 at [42]; Re Nexus Energy Limited (2014) 105 ACSR 246 at 254 [24]. RG 111.74 Experts should: (a) value any underlying assets, and where necessary business(es), using the guidance in Part C, including crosschecks; (b) consider valuation evidence provided by the sales process conducted by the administrator (if any) as well as the value (if any) of potential recoveries for voidable transactions; and (c) seek specialist technical assistance, where relevant, consistent with the requirements in Section E of Regulatory Guide 112 Independence of experts (RG 112). RG 111.75 The selection of the appropriate approach and methods to value company assets and/or businesses will depend on the facts and circumstances involved, available data and the professional judgement of the expert. The rationale for the selection of the approach and method used should be fully disclosed in the report. Page 20 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 20 Asset and business valuations RG 111.76 We expect in many cases that it will be clear from the administration process whether the company under administration holds a business (or businesses) capable of sale or, rather, a series of assets that, but for the proposed DOCA, would otherwise be sold on a piecemeal basis to realise value (if any). RG 111.77 Where a company under administration holds assets that form a business, the expert should generally base the assessment on the higher of; (a) the sum of liquidation value of the underlying business assets; and (b) the value of the business as a whole. RG 111.78 A business will likely be subject to various constraints associated with the company being under administration. These may affect the expected performance of the business directly and/or perceptions of business risk to potential acquirers. These should be considered by the expert in deriving the expected sale value of the business and should be disclosed in the report. RG 111.79 Any assets that do not form part of the business may be valued assuming liquidation value. Liquidation value is defined by the International Valuation Standard 104: Bases of Value (effective 31 January 2020) at paragraph 80.1 as: the amount that would be realised when an asset or group of assets are sold on a piecemeal basis. Liquidation Value should take into account the costs of getting the assets into saleable condition as well as those of the disposal activity. Liquidation Value can be determined under two different premises of value: (a) an orderly transaction with a typical marketing period, or (b) a forced transaction with a shortened marketing period. RG 111.80 Valuations of residual company assets should generally be determined using the premise of, ‘… an orderly transaction with a typical marketing period’. The marketing period assumption should be disclosed by the expert. Page 21 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 21 C Methodologies and assumptions Key points An expert should: • if possible use more than one valuation methodology and compare the values derived from using different methodologies to minimise the risk that the opinion is unreliable; and • justify its choice of methodologies and describe the methods used: see RG 111.81–RG 111.90. An expert’s opinion should be based on reasonable assumptions and all material assumptions should be disclosed: see RG 111.91–RG 111.94. An expert should usually give a range of values and that range should be as narrow as possible: see RG 111.95–RG 111.96. An expert might need to value individual assets in certain circumstances: see RG 111.97–RG 111.100. Choice of methodology RG 111.81 An expert should use its skill and judgment to select the most appropriate methodology or methodologies in its report. The expert must have a reasonable (or tenable) basis for choosing its valuation methodologies: Re Matine (1998) 28 ACSR 268 at 290–291. An inappropriate choice might be misleading: Re EPHS Ltd [2002] ATP 12. It might also lead to liability because the expert did not take sufficient care and skill in the preparation of the report: Duke Group Ltd v Pilmer (1999) 31 ACSR 213. RG 111.82 We consider that an expert should, when possible, use more than one valuation methodology. We consider that this reduces the risk that the expert’s opinion is distorted by its choice of methodology. We also consider that an expert should compare the figures derived from using the different methodologies and comment on any differences. Further, if the expert’s valuation of a company’s securities differs materially from the price of the company’s securities in the period leading up to the announcement of the proposed transaction (together with a typical premium for control for such a transaction), the expert should comment on this difference and the factors underlying it. The expert should also comment if its valuation is less than the price of the company’s securities in the period leading up to the announcement of the transaction. Note: The expert should also consider whether the price of the company’s securities is an appropriate valuation methodology: see RG 111.86(d). Page 22 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 22 RG 111.83 However, we will not prescribe the valuation methodologies that an expert should use in preparing its report since an expert should exercise its own skill and judgment to choose methodologies that are appropriate in the circumstances of the entity or the asset being valued. RG 111.84 An expert should justify its choice of methodology or methodologies (including when the expert has used only one methodology, the basis for doing so) and describe the method or methods used in the report. We consider that an expert report that does this allows security holders to better understand the expert report and determine the weight to be attached to the report. It also allows another expert, professional adviser or institutional investor to replicate the expert’s work and assess the valuation. RG 111.85 An expert should discuss how much weight is being placed on each methodology used in the valuation. For instance, one methodology may be identified as the primary methodology whereas another is used to provide a cross-check to the valuation. RG 111.86 It is generally appropriate for an expert to consider using the following methodologies: (a) the discounted cash flow method (see also RG 111.112–RG 111.118) and the estimated realisable value of any surplus assets; (b) the application of earnings multiples (appropriate to the business or industry in which the entity operates) to the estimated future maintainable earnings or cash flows of the entity, added to the estimated realisable value of any surplus assets; (c) the amount that would be available for distribution to security holders on an orderly realisation of assets; (d) the quoted price for listed securities, when there is a liquid and active market and allowing for the fact that the quoted price may not reflect their value, should 100% of the securities be available for sale; and (e) any recent genuine offers received by the target for the entire business, or any business units or assets as a basis for valuation of those business units or assets. Note: Some valuation methodologies include a premium for control while others do not. An expert needs to ensure that the choice of methodology or methodologies is appropriate for the circumstances of the transaction. RG 111.87 The amount an alternative bidder might be willing to offer if all the securities in the target were available for purchase may provide a useful framework for the application of methodologies (e.g. in selecting earnings multiples) and in underpinning any overall judgment as to value. Page 23 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 23 RG 111.88 An expert should not take into account highly speculative alternative proposals which are so unformulated that no sensible value could be placed on them. RG 111.89 If an entity has recently conducted a sale process without success or has been ‘in play’ for some period without an alternative bid emerging, it may be possible to comment that no alternative acquirer appears likely to offer a higher price. Option valuations RG 111.90 The most commonly used methodologies for valuing unlisted or thinly traded options are the Binomial Model and the Black–Scholes Model. In selecting an approach, an expert should assess whether the assumptions used in the methodology are appropriate for the options being valued. Assumptions RG 111.91 An expert’s opinion should be based on reasonable assumptions. This reduces the risk that the report will be misleading: s670A(2); s12DA of the Australian Securities and Investments Commission Act 2001 (ASIC Act); MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 313 at 356; RAIA Insurance Brokers v FAI General Insurance Co Ltd (1993) 112 ALR 511 at 522. RG 111.92 An expert should disclose all material assumptions on which its report is based. This allows security holders to assess the reasonableness of the report and its main uncertainties: Re BNQ Sugar Pty Ltd and Others (1994) 12 ACSR 695 at 702; GIO Australia Holdings Pty Ltd v AMP Insurance Investment Holdings Pty Ltd (1998) 29 ACSR 584 at 621–622. RG 111.93 The material assumptions disclosed should be specific and definite. All- embracing assumptions of no specific relevance to the entity being valued should not be included (e.g. the continued absence of war or the non- occurrence of natural disasters). However, assumptions concerning specific future economic conditions (such as assumed interest rates, exchange rates and commodity prices) and the assessment of their impact on the report should be disclosed. RG 111.94 If changes in material assumptions are likely to materially impact on a report’s valuation (e.g. changes in the exchange rate or interest rate assumptions), an expert should consider including a sensitivity analysis which sets out the impact of such changes. Note: See Regulatory Guide 170 Prospective financial information (RG 170) at RG 170.65–RG 170.66. Page 24 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 24 Value ranges RG 111.95 An expert should usually give a range of values. The value of securities is typically subject to uncertainty and volatility. Placing a precise dollar value on them is likely to imply a misleading accuracy to a valuation. RG 111.96 Nevertheless, the range of values should be as narrow as possible. If an expert cannot give a narrow range because of uncertainty (e.g. start-up companies), the expert should prominently explain in its report what factors create this uncertainty and how the expert is able to justify its findings despite the uncertainty. In our view, a broad range of values undermines the usefulness of the report. Valuing assets RG 111.97 An expert might need to value individual assets in undertaking the analysis required to prepare its report, for example, if the assets are considered ‘surplus’ to other business activities being valued. In valuing individual assets, an expert may need to quantify and discuss any material differences between its valuation and the market value of the asset used for accounting purposes. RG 111.98 An expert may also need to assess the carrying value of an entity’s assets if the primary valuation methodology it has employed results in a value that is less than the entity’s reported net assets (after allowing for reasonable realisation costs). RG 111.99 In such circumstances, the expert should ensure that it has the expertise to value the assets (e.g. to value real property or exploration mining tenements) or retain a specialist to do so. RG 111.100 Real property assets that are planned or are in the process of development should be valued on the basis of their current market value rather than on an ‘as complete’ basis. Page 25 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 25 D Other key requirements Key points An expert report should help security holders make their decision by clearly disclosing key information: see RG 111.101–RG 111.106. An expert’s opinion should be based on reasonable grounds. These grounds should be discussed in the report: see RG 111.107–RG 111.118. An expert might need to act on changes in circumstances after issuing its report: see RG 111.119–RG 111.121. Particular considerations apply to the inclusion of certain information (e.g. disclaimers): see RG 111.122–RG 111.133. An expert should have the relevant expertise to prepare the expert report: see RG 111.134–RG 111.139. An expert should maintain adequate records of the work undertaken to prepare the expert report: see RG 111.140–RG 111.144. Clear, concise and effective communication RG 111.101 An expert report should help security holders make their decision. The report should: (a) address the varying information needs of a report’s audience; (b) clearly explain the meaning of the expert’s opinion and the significance of that opinion to the decision to be made by security holders; (c) highlight key information; (d) be easy to navigate and understand (e.g. through including an up-front summary of the expert’s opinion and the reasons for the opinion, the use of content tables, signposting, cross-references, numbered sections, sub- sections and the avoidance of jargon); and (e) be as brief as possible. RG 111.102 An expert report should only contain information that relates directly to the decision to be made by security holders. Including extraneous information in an expert report undermines the effectiveness of that report. Santow J dealt with this issue in Re Australian Co-operative Foods Ltd (2001) 38 ACSR 71 at 77 in the following terms: Experts are responsible for what they say in their reports. They must ensure that their reports deal adequately with the kind of concerns that could reasonably be anticipated from those affected by the scheme, in reporting Page 26 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 26 on whether the relevant scheme proposal is fair and reasonable from their viewpoint … This is so those members can then make an informed decision with the benefit of a report that is as simple, clear and useful as possible. A plethora of peripheral information is more likely to distract than illuminate. RG 111.103 For example, an analysis of the industry in which the company (i.e. the subject of the opinion) operates might be useful. However, copying material out of an industry research database may merely add to the length of reports. An expert should include an analysis of the material and relate the material directly to its opinion. Technical terms RG 111.104 Technical terms should be avoided when possible. If the expert uses technical terms, it should use them consistently in a report and consistently with the way they are used in the relevant industry. When appropriate, the expert should provide a glossary, especially when the definition or interpretation of specific terms is central to its report. Concise or short form expert report RG 111.105 We encourage an expert to consider preparing a concise or short form expert report. The commissioning party would make a longer expert report containing additional, more technical or detailed information available on request free of charge or ensure it is accessible online. This reflects a developing market practice. Note: See RG 60.84 for information about the use of concise expert reports in schemes of arrangement. RG 111.106 The concise report would still need to contain sufficient information to help security holders make their decision. The concise report should include the information that we emphasise in the rest of this guide and in RG 112 (e.g. material assumptions). If the longer report contained any ‘surprises’ for the security holder who only read the concise report, this would indicate the concise report was inadequate or misleading. Table 2 contains examples of types of information that an expert might consider including and leaving out of the concise report. Determining what information to include in the concise report and what to leave out is a matter for the expert’s professional judgment in the particular circumstances of the report. However, we are happy to work with experts on these issues. Page 27 REGULATORY GUIDE 111: Content of expert reports © Australian Securities and Investments Commission October 2020 Page 27 Table 2: Examples of information that an expert might consider putting in and leaving out of a concise expert report Include in the concise expert report  Expert’s conclusion  Meaning of conclusion and significance for the decision to be made  Summary of reasons for conclusion  Summary of valuation including: − methodologies used; − material assumptions;