Directors should scrutinise IFA opinions, IFAs must not be swayed by conflicts: SGX RegCo

COMPANY directors should scrutinise any opinion delivered by an independent financial adviser (IFA), especially if the IFA’s analysis appears insufficient.

IFAs, meanwhile, must not tailor their opinions to support any parties or outcomes.

These are some of the guidelines on IFAs released by Singapore Exchange Regulation (SGX RegCo) on Monday (Jul 3), to supplement guidance given by the Securities Industry Council.

SGX listing rules require that an IFA be appointed to deliver an opinion when a company is faced with an exit offer or considering an interested party transaction (IPT).

At times, SGX RegCo may also issue a notice of compliance requiring the appointment of an IFA to review a transaction.

In a regulator’s column accompanying the release of the guidelines, SGX RegCo chief executive Tan Boon Gin said he hoped the guidelines would serve as a starting point to “improve the standards, clarity and consistency of advice” that IFAs provide in their opinions.

“The purpose of requiring an IFA is to ensure that the directors receive an independent and professional opinion on a proposed transaction, including the impact on the issuer,” Tan added.

Some of the guidelines highlighted in Tan’s column were:

• The IFA must be independent and be able to give competent independent advice. No party should take any action that could compromise the IFA’s independence.
• Where third-party expert opinion or valuation is involved, the IFA must assess its relevance and recency.
• An IFA opinion should contain a clear and unequivocal conclusion.
• Where the transaction involves alternative forms of consideration (such as a scrip option, a cash option or a mix of both), each form should be opined upon.
• Where comparable data is or is not taken into consideration for the purpose of the recommendation, the basis for the selection should be clearly explained.

The issuance of the new guidelines follows some controversial IFA opinions in the past year.

Most recently, in February, SGX RegCo reminded the board of Golden Energy and Resources (Gear) to ensure that its IFA pay attention to both the terms of a proposed distribution and exit offer, as well as the cash consideration being offered.

The IFA’s opinion had subsequently come under criticism, both from The Business Times’ senior correspondent Ben Paul and the Securities Investors Association (Singapore), or Sias.

Sias president and chief executive David Gerald said that the association welcomes the guidelines, and that it is “certainly helpful” for the market that guidance has been provided, particularly to directors, on the appointment of IFAs to allay concerns on their independence.

He added that while SGX RegCo’s listing rules require an exit offer to be fair and reasonable, there are other mechanisms, such as a general offer under the takeover code, that can also be used to take a company private.

“Shareholders should study the IFA report carefully to evaluate the attractiveness of the offer,” he said, adding that Sias will continue to provide guidance on the fairness of offers.

Mark Liew, chief executive of professional services firm PrimePartners Corporate Finance, said that the guidelines set out “more detail on the various factors and methodologies” to consider, and generally reflect existing market practice.

He also does not foresee significant changes to his firm’s processes arising from the guidelines.

In its guidelines, SGX RegCo noted that the IFA’s opinion typically comes under increased scrutiny when an offer price is set below the net asset value (NAV) or revalued NAV.

Under such circumstances, an IFA that has chosen an asset-based approach in its valuation should “clearly explain” the fairness and reasonableness of the offer when queries are raised.

The guidelines also state that an IFA should take into account changes to the market price of an issuer’s asset after a proposed transaction is announced.

To help the IFA with its work, an issuer should provide the IFA with unimpeded access to persons, premises, documents, reports, information and valuations.

Directors should also review whether the IFA has the appropriate and relevant experience and whether there is information that casts doubt on its competency, quality of advice and resourcing.

“The directors should be cognisant of the constraints that the IFA may face, including the tight transaction timeline, and seek to enable the IFA to best deliver its analysis and opinion within the stipulated timeline,” it added.

Indeed, a market professional told BT that it is not uncommon for boards to start interviewing and assessing IFAs only after an offer announcement is made. This shortens the time available for assessment.

Offer documents must be sent out between 14 and 21 days after an offer is announced. Within 14 days of the offer documents’ despatch, the offeree circular, which includes the IFA’s advice, has to be sent out.

“Given the time constraints, the IFA will rely on information provided by the company as there is insufficient time to independently verify all information that is provided to them by the company within this timeframe,” the market professional said, asking not to be named.

Such time constraints are “often highlighted”, he added.

On the topic of independence, he noted that it is “not uncommon” in other jurisdictions for boards to set up independent committees to discuss and negotiate possible privatisation offers from a parent company or controlling shareholder.

Such a committee would also be responsible for appointing the relevant professional firms, such as IFAs and valuers, to advise on the terms of an offer.

In certain instances, the independent committee would also consider the possibility of an alternative or competing offer.

Said the market professional: “A more transparent and rigorous decision-making process starting at the board level would help to address the perception of independence and potential conflicts.”

Sias’ Gerald also noted that the association is aware of shareholders’ concern that IFAs are appointed by directors, who are also their paymaster, and that the association will continue to closely scrutinise IPTs and offers.