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Client Update: Mergers & Acquisitions – 21 December 2007

Guidance on better independent expert reports

In brief: The Australian Securities and Investments Commission has released two new regulatory guides relating to expert reports – Regulatory Guide 111: Content of Expert Reports and Regulatory Guide 112: Independence of Experts – to replace its previous policies on independent expert reports. Lawyers Christalyne Look and Deborah Doctor examine these new guides.

How does it affect you?

  • Whether you are engaging an expert or preparing an independent expert report for a transaction, you will need to be familiar with the two new regulatory guides.

Background

The Australian Securities and Investments Commission (ASIC) has released two new guides – Regulatory Guide 111: Content of Expert Reports (RG111) and Regulatory Guide 112: Independence of Experts (RG112). In releasing the guides, ASIC said that, while it 'has seen an improvement in the overall quality of expert reports in recent years, concerns remain that they are too long'.

The new guides address this issue, as well as perceptions that some expert reports are not sufficiently independent. They follow on from ASIC's earlier policy proposal paper titled Better Experts' Reports, which was released in February 2005.

What has changed?

RG111 and RG112 were introduced on 30 October 2007 to replace ASIC's four policies on independent expert reports, which were Regulatory Guide 12: Valuation reports and profit forecast (RG12), Regulatory Guide 42: Independence of expert reports (RG42), Regulatory Guide 75: Independent experts' reports to shareholders (RG75) and the following paragraphs of Regulatory Guide 74: Acquisitions agreed by shareholders (RG74): RG74.15, RG74.20–RG74.29.

Broadly, the new guides cover the same matters as the previous policies and consolidate the multiple policies into two documents. However, there are differences between the new guides and the previous policies and the new guides also provide additional commentary.

The main difference under the new guides is that they focus on reports prepared for takeovers, schemes of arrangement and compulsory acquisitions, whether the reports are required by the Corporations Act 2001 (Cth) or are commissioned voluntarily. According to ASIC, security holders regard an expert report as being prepared by an independent expert, irrespective of whether the report has been prepared voluntarily or under a statutory requirement. This approach is consistent with the obligation of a holder of an Australian Financial Services licence (AFS licensee) to manage conflicts of interest for all expert reports it prepares. The previous policies on independent expert reports did not expressly encompass reports that were commissioned voluntarily, so the new guides have a wider scope. These new guides do not, however, apply to independent or investigating accountant reports.

Other points to note are:

Guidance on the content of expert reports – RG111

  • The guide, more than its predecessors, suggests a number of matters that ASIC considers need to be included in a report. ASIC, however, also emphasises that it wants reports to 'be as brief as possible'. Perhaps acknowledging these potentially conflicting requirements, ASIC supports the use of concise or short-form reports.
  • ASIC emphasises its expectation that experts 'critically evaluate' information provided to them. This is particularly the case for prospective financial information. Experts may need to clarify with ASIC what its expectations are in this area.
  • Related to the previous point, ASIC also comments on the proper scope of disclaimers and indemnities from the commissioning party.

Guidance on the 'independence' of experts – RG112

  • The guide takes account of the fact that most experts will now hold Australian financial services licences and, thus, be subject to general licensee obligations, such as managing conflicts of interest, as well as the rules about use of the word 'independent'.
  • Partly as a result of the above, this guide (and RG111) focuses more on the expert's systems and procedures than its predecessors. From a practical perspective, this new emphasis may have the biggest impact on experts, as it is likely they will need to review their current processes against the guide's recommendations and interaction with clients may need to be further formalised and controlled.

If you would like more detail on these guides, go to the Overview of new regulatory guides for expert reports.

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