Under the SGX Listing Rules, an independent financial adviser (IFA) must be appointed for exit offers, interested person transactions (IPT) and, in some cases, under a Notice of Compliance (NOC), to direct the issuer to undertake certain actions or review transactions as required by the Exchange.
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. In relation to IPT, the directors should take into consideration such independent advice and make a recommendation to shareholders as to whether the transaction is on normal commercial terms and not prejudicial to the interests of the issuer and its minority shareholders. For exit offers, the directors would make a recommendation on whether to accept the terms of the offer after taking into consideration the opinion of the IFA.
The directors must also make known the IFA’s advice to shareholders. Shareholders should review the directors' recommendations and the IFA’s advice carefully before coming to a decision on the proposed transaction, taking into account their individual circumstances and considerations.
This Regulator’s Column highlights Singapore Exchange S68 Regulation’s (SGX RegCo) expectations of IFAs and their opinions, and the role that the directors play in procuring such advice, in the context of the SGX Listing Rules. SGX RegCo has published a more detailed Guide on Independent Financial Advisers available here.
For further information on what is expected of IFAs and their opinions under the Singapore Code on Takeovers and Mergers (Take-over Code) for take-over offers and whitewash resolutions, please refer to the Take-over Code and practice statements here.
Expectations of directors
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The IFA opinion is important in informing the directors and shareholders. Where the proposed transaction involves the existing controlling shareholders or management, the independence of the IFA and its advice is of particular importance.
SGX RegCo expects the directors to take the following factors into consideration when appointing an IFA:
• The IFA (including the professionals involved in preparing and approving the IFA opinion) must be independent and be able to give competent independent advice. No party should take any action which could fetter or compromise the independence of the IFA.
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• The directors should review the suitability of the professionals involved in preparing and approving the IFA opinion, including:
o whether they have appropriate and relevant experience; and
o whether there is information that casts doubt on their competency, the quality of advice and their resourcing.
• The issuer should provide the IFA with unimpeded access to persons, premises, documents, reports, information and valuations as the IFA reasonably requires to undertake its analysis and to issue its opinion. The issuer should ensure that the relevant valuation reports, expert reports and financial reports contain the necessary disclosures for the IFA to issue its opinion.
• 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.
• The directors should carefully assess the contents and material considerations contained in the IFA opinion for reliability, accuracy and reasonableness of information and critically engage the IFA on the IFA’s analysis and resulting opinion, especially where such analysis appears to be insufficient or to warrant further elaboration or substantiation.
• The directors should refer to guidance under the Take-over Code to assess an IFA’s independence for the purposes of its appointment where relevant.
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Expectations of IFAs
The key tenets of an effective IFA opinion are that the IFA must be independent and that the IFA opinion must represent the objective views of the IFA. The IFA should therefore exercise due care, skill and professional judgement in preparing its opinion.
The IFA should refer to guidance under the Take-over Code to assess its independence for the purposes of its appointment where relevant. The IFA must have a reasonable basis for its opinion.
The IFA must not tailor its opinion to support the views of a commissioning party or any other interested party, or to arrive at a desired outcome. To arrive at its opinion, an IFA is normally expected to perform the following:
• Obtain all information and documents of the issuer relevant to its assessment and assess if the information is sufficient for the IFA to form an informed opinion;
• Review the fairness, reasonableness and completeness of assumptions or projections relevant to the transaction (to the extent feasible);
• Where third-party expert opinion or valuation is involved, assess its relevance and recency to determine if reliance on the opinion or valuation is reasonable;
• Critically review the information, documents, third party expert opinion or valuation obtained; and
• To the extent reasonably practicable, provide quantitative information on the factors the IFA considers to be material. For example, in an exit offer:
o the IFA can consider any previous recent offers (if any); and
o if the IFA comments that the share price may fall if the bid is unsuccessful, the IFA should consider providing quantitative information such as pre-announcement share price or volume weighted average price and the liquidity profile of the securities subject to the offer. The IFA opinion should, among others, also contain the following information:
• A clear and unequivocal conclusion, as applicable:
o for exit offers, whether they are ‘fair’ and ‘reasonable’. Where the transaction involves alternative forms of consideration (e.g. a scrip option, a cash option or a mix of both), each form should be opined upon;
o for IPTs, whether they are on normal commercial terms and whether they are prejudicial to the interests of the issuer and its minority shareholders;
o for IPT mandates, whether the methods or procedures in determining transaction prices are sufficient to ensure that the transactions will be carried out on normal commercial terms and will not be prejudicial to the interests of the issuer and its minority shareholders; or
o as required by any NOC, where relevant.
• The factors considered in, and the grounds for, forming an opinion. It should state and explain whether certain factors are determinative of its recommendations.
• Where relevant and where there is comparable data (e.g. privatisation of peers or financial ratios of peers) which is or is not taken into consideration for the purpose of the recommendation, the basis for the selection should be clearly explained. This may include explaining the parameters or criteria for selecting the comparable data, the reasons for using these parameters or criteria, and any adjustments for the dissimilarities among the comparable data.
• The methodologies used when conducting an analysis on the proposed transaction.
• Any material relationships or interests (with a commissioning party or any other interested party) that could reasonably be regarded as relevant to the independence of the IFA (including any fee or benefits (whether direct or indirect) to be received in connection with the issuance of its opinion.
Conclusion
SGX RegCo is issuing the Guide on Independent Financial Advisers as a starting point to improve the standards, clarity and consistency of advice that IFAs render in their opinions. We expect IFAs and the directors of issuers to uphold the standards and integrity of independent financial advice. The Guide is found here.
Tan Boon Gin is CEO SGX RegCo, Michael Tang is head of listing policy and product admission at SGX RegCo
