ASIC Shines a Spotlight on Independent Expert Reports

During 2017 ASIC has been looking closely at independence and the quality and reliance on the information provided to an expert when preparing an independent expert report.

In a letter sent to licensed independent experts in February, ASIC put experts on notice that they will be reviewing engagement files across a number of transactions and these reviews may take place while the transaction is live.

Key areas of interest are as follows:

1. Who to engage as an expert?

While it may appear cost effective to engage a less expensive expert, an expert that has experience in a particular transaction type, industry and/or company size is much better placed to deliver a report on which directors can confidently rely upon as the basis for their recommendations.

ASIC often asks questions, or raises concerns, when reviewing transaction documents. However, they have observed that the more serious concerns with independent expert reports are more commonly raised in relation to reports produced at considerably lower price points than those of other experts. They have also found that reports prepared by an expert that doesn’t regularly prepare reports for public control transactions can often be deficient, leading to closer scrutiny.

A compromise in quality to save money can lead to closer scrutiny by ASIC, or in hostile transactions the increased risk that a transaction may be challenged. To the extent that additional information may be required, considerable delays to the transaction timetable and/or other consequences for the company, independent expert and legal advisors to manage.

2. The quality and extent of information provided to the expert

In its letter to experts, ASIC highlighted concerns around experts who are not completing an appropriate critical evaluation of the information received from the company and relied upon when preparing a report. ASIC will expect to see appropriate evidence of support for the relevant information that was provided to the expert.

This support should include a robust critical review by relevant parties for relevance, completeness and accuracy. To assist to identify matters early, it is prudent for a company to complete an appropriate internal review of the relevant information prior to providing that information to an expert, so that the information can be provided with confidence in the first instance.

This is particularly important where the information includes prospective information and forecasts. The expert must understand the importance of completing the relevant review work and establishing a reasonable basis for the information. The expert must also understand the level of disclosure that is appropriate to include in a report to shareholders.

One key indicator to ASIC that there has been insufficient critical evaluation of information provided by the expert is the level of fee charged by the expert in the context of the transaction. A lower fee may suggest to ASIC that a sufficient amount of work has not been completed.

Experts are also on notice that ASIC may request an expert’s working papers to assess the level of work the expert has completed in evaluating and testing the information provided. Given this focus, it will not be surprising to find that expert reports being prepared at ‘lower price points’ begin to disappear.

The company, its lawyers and the expert must be vigilant when it comes to disclosure of material information. Omission of material information at the time the report is being prepared or even worse when ASIC is reviewing the transaction, can significantly delay or derail the transaction. Provide all the information that the company is aware of as well as any information relating to the specific transaction that is the subject of the report. Make sure it is in sufficient detail for the expert to determine its relevance.

3. Preserving independence and working papers

ASIC has a concern that some experts may not be meeting the independence requirement prior to commencing the engagement or that independence is compromised during the engagement. Experts must be able to show ASIC that they are routinely keeping adequate records of communications with all parties. In that communication experts can discuss a range of matters including the progress of the report, requests for additional information or clarifications and requests for the company to review matters of fact or correct factual errors.

To ensure that independence is maintained, the company must avoid engaging with the expert on the company’s views on the transaction and on the opinion that the expert should come to. The company should also avoid discussions on the methodologies that the expert should consider and/or adopt.

As directors often base their recommendations on the report of an independent expert, it is not surprising that hostile yet interested parties will attempt to derail a transaction by attacking the expert report or attempting to compromise independence. In these circumstances an expert will only supplement a report if a material change to its contents is necessary. To preserve independence the expert will not engage with the hostile interested parties and will only agree to the release of a final and full supplementary report, not any preliminary announcements.

Finally, to mitigate against time consuming and expensive delays, experts should be sure to keep working papers in good order and readily available.

Author: Sherif Andrawes and Jane Gouvernet, BDO Australia