Northern Energy Corporation's defence of the hostile bid by New Hope Corporation resulted in New Hope taking Northern Energy to the Takeovers Panel for alleged deficiencies in Northern Energy's target's statement and the independent expert's report.  

Due diligence condition

New Hope's bid was conditional on the target's statement containing a statement confirming the pricing under a key off-take agreement. In particular that the price at which coal was purchased under the off-take agreement is "equivalent to the average quarterly price for Peak Downs, Saraji and Goonyella hard coking coal adjusted for quality variations and/or penalties". In seeking additional information, the condition is effectively a form of forced due diligence.

The target's statement did not contain the statement about the off-take agreement required to satisfy New Hope's bid condition.

However, an earlier announcement and the target's statement did include other material information about the off-take agreement including that the off-take agreement was expected to produce approximately $700 million revenue. Separately, the expert's report included some pricing assumptions in its valuation.

New Hope submitted that those disclosures were inadequate and without the detailed pricing information it could not determine what price to offer under the bid.

New Hope complained that it was not clear how the price payable under the off-take agreement compared to certain benchmark pricing arrangements. The Panel disagreed, pointing to a 3% discount applied to the benchmark price by the expert in its valuation and inferring from this that the expert must have reviewed the agreement. The Panel noted that it would have been misleading to make such statements about pricing without reviewing the terms of the agreement and reflecting it in the expert's comments on pricing.

The Panel dismissed a submission from New Hope that Northern Energy's failure to disclose the information the subject of the bid condition deterred its bid and effectively put in place a poison pill. In doing so, the Panel observed that it would be concerned if Panel applications were to be used to extract due diligence from a reluctant target.

The Panel decided that provided target directors act for proper purposes and satisfy the disclosure requirements of the Corporations Act (i.e. that the target's statement contains all information that shareholders reasonably require to make an informed assessment whether to accept the offer), they have a right (and an obligation) to use the target's information for the best advantage of the company. This is the case even if it results in the non-satisfaction of a defeating condition. This is consistent with the Panel's previous decision in Goodman Fielder 02 [2003] ATP 5.

Directors' review of expert's valuation

Northern Energy's target's statement included a unanimous board recommendation that shareholders should reject the offer. The target's statement annexed an independent expert's report, which concluded that New Hope's offer of $1.50 per share was neither fair nor reasonable. The expert's report valued the shares at between $3.48 and $4.75 per share or between $2.70 and $3.99 allowing for funding requirements.

New Hope alleged various deficiencies in the target's statement. New Hope submitted that the target's statement was misleading because it presented the expert's valuation without also providing a critical analysis or discussion of key assumptions made by the expert.

The Panel agreed that directors cannot "blindly rely" on an expert's report.

However, in the absence of factors indicating a reasonable basis for disagreeing with a material aspect of the expert's conclusions, the directors should be able to rely on the expert's report. On the other hand, if the directors have a reasonable basis for disagreeing, this should be disclosed to shareholders in the target's statement.

The Panel also stated that directors should check that all material information is made available to the expert.

Clear and concise expert's reports

New Hope made a number of submissions about assumptions made by the expert in preparing its valuation. The Panel required that a number of additional disclosures be made in the expert's report, principally to make it easier for shareholders to understand.

In its decision, the Panel stated in passing that the expert's report ran to approximately 80 pages and a technical report upon which it relied for a further 55 pages. While noting that such length is not untypical of reports of this kind, the Panel queried whether a much shorter report might be more helpful to shareholders.

The Northern Energy matter together with the decisions in Goodman Fielder 02 and Bowen Energy 02R are examples of the Panel being prepared to review expert's reports and, where it considers necessary, require supplementary expert's reports.

Postscript

Following the Panel matter and an increase in New Hope's bid price to $1.85 per share, the target directors recommended acceptance notwithstanding that the price was still significantly lower than the $2.70 lower end of the expert's valuation.