UCL Resources Limited (UCL) alleged numerous defects with the target’s statement lodged by Minemakers Limited (Minemakers), including defects in the valuation of Minemakers’ projects, defects in the methodology applied by the independent expert and a failure to provide balanced disclosure particularly by providing a front cover that focussed solely on the disadvantages of the UCL offer.  Minemakers had issued a supplementary target’s statement to address some, but not all, of the concerns raised by UCL, before UCL applied to the Takeovers Panel (Panel).

High threshold to cross before Panel will review expert’s report
The Panel declined to conduct proceedings, as the issues raised by UCL were matters which could be dealt with by a supplementary bidder’s statement or were matters for the expert to determine, rather than the Panel.

In reaching this conclusion, the Panel affirmed the approach which it has taken in the past to determining applications relating to independent expert reports.  In summary, the Panel will only intervene where there are

  “strong preliminary indications of

  • a clear fault in the methodology, which would normally include non-compliance with relevant industry codes
  • statements that are plainly false and material to the conclusion
  • the expert having reached a conclusion that no reasonable expert could reasonably arrive at
  • a question mark over the independence of the expert or
  • some other basis taking the issue beyond what might be described as simply matters on which experts might disagree.” ([2012] ATP 13, paragraph 20)

This shows that there needs to be a real, substantial problem with the expert’s report – clear and material error or unreasonableness -  or that the expert’s independence must have been compromised, before the Panel will become involved. This approach is entirely appropriate as it is not the Panel’s place to, in effect, referee disputes between experts for the bidder and the target. The parties need to slug it out between themselves through their bidder’s and target’s statements, where the issues in dispute are questions of valuation methodology and approach. This battle of the experts may be confusing for shareholders who may be inundated with documentation, but ultimately, it is up to the bidder and target to convince the shareholders that their approach is the correct one. It is not for the Panel to decide which expert is correct or preferable.

There is nothing in the Panel’s decision which suggests a change of approach since ASIC revised Regulatory Guides 111 (Content of Experts’ Report) and 112 (Independence of Experts) in 2011. While ASIC envisages seeking orders from the Panel if it is concerned about an expert’s report or the independence of the expert, ASIC would need to satisfy the Panel of the same threshold issue as a bidder, to get a hearing from the Panel.

Can the front page ever be balanced?

One of the issues raised by UCL was that the target’s statement, as lodged with the ASX, was preceded by a one page document giving the key reasons for the directors’ “Reject” recommendation, which was not balanced disclosure.

The Panel was not persuaded by this argument. The relevant page noted that it was a summary only and directed shareholders to review the entire target’s statement. The Panel accepted that a page such as that complained of may give rise to unacceptable circumstances. However, it also recognised that the purpose of the target’s statement was to give the reasons to reject the offer, in the same way that a bidder’s statement would give the reasons to accept the offer. 

It seems a very long bow for any bidder to expect the cover page to provide a balanced discussion of the merits of its offer, when the target board is recommending rejection.   It is extremely unlikely that any bidder would provide an upfront summary of reasons to reject its offer, which would be the natural (but equally illogical) corollary of UCL’s expectation of the target’s statement.

Be clear and concise to avoid delay

The Panel decision notes that the application exceeded the maximum 10 pages, which is requested in its Procedural Rules, and that the 22 page table of issues and submissions tended to obscure the arguments. If the Panel had decided to conduct proceedings, it would have required UCL to rewrite the application.

It is open to speculation whether, if the application had been more concisely worded, the Panel may have been able to discern issues of sufficient significance that the high threshold required may have been satisfied. Whether or not this may have been the case, UCL would have suffered more delay in having its issues dealt with, if it had to rewrite the application to identify precisely the issues complained of. 

The challenge for applicants and their advisers is to distil the key issues simply and concisely, so that the Panel can clearly identify the key issues and the reasons for conducting proceedings and granting relief. While this is no doubt challenging, particularly when there are complex valuation issues to be explained, avoiding the delay caused by not doing so (or, worse, failing to get the Panel to conduct proceedings) is a big incentive to rise to the challenge.