On 17 October 2018 the UK Takeover Panel published Public Consultation Paper 2018/1, which sets out several proposed amendments to Rule 29 of the Takeover Code relating to asset valuations.
Asset valuations have been required in at least three UK takeover situations in 2018 including the ongoing possible offer by a consortium comprising The Peel Group, The Olayan Group and Brookfield property Group for Intu Properties (valuation of the target's properties), CareTech's offer for Cambian (valuation of the bidder's and the target's properties) and Stafford Capital Partner's offer for Phaunos Timber (valuation of the target's properties).
The purpose of the panel's proposed amendments is to provide a more logical framework for this rule and to reflect the panel's current practice. Responses to the consultation should reach the panel by 7 December 2018.
In general, Rule 29 of the code provides that where a valuation of assets is given in connection with a takeover offer, it should be supported by the opinion of a named independent valuer. The rationale for this requirement is that shareholders of a target should have the benefit of an opinion on such valuation from an independent and competent valuer as such valuation is likely to be of importance to target shareholders' decision on whether or not to accept the offer. Rule 29 also sets out requirements in respect of the valuer's qualifications, the basis of the valuation and the publication of such opinion.
In its consultation paper, the panel has proposed that Rule 29 be amended to clarify that it applies to any asset valuations published by the target or by a bidder offering securities as consideration:
- during the offer period;
- in the 12 months prior to the start of the offer period; or
- more than 12 months prior to the start of the offer period, but only if attention is drawn to that valuation by the relevant party in the context of the offer.
The panel has also proposed to clarify that Rule 29 would not apply to a valuation that the panel considers immaterial to target shareholders in making a properly informed decision on the offer, and that the rule is not intended to apply to a valuation which is set out in a company's financial statements, only as a result of accounting practice and which is not otherwise referred to by the relevant party in the arguments as to the merits or demerits of the offer. In addition, the panel noted in its consultation paper that Rule 29 would not apply to asset valuations published by cash bidders in respects of their own assets.
Rule 29 would be amended to reflect the panel's current practice of principally applying the rule to valuations of real property, mineral, oil and gas reserves and unquoted investments, and to require the relevant party to consult the panel if a valuation of other assets or liabilities has been or is proposed to be published (with the Panel given the discretion to apply Rule 29 to such valuation).
The panel observed in its consultation that Rule 29 has been applied on occasion to valuations of other assets (eg, brands, diamond gemstones and public to private infrastructure), and that it would not normally expect Rule 29 to apply to assets and liabilities such as the embedded value of life assurance contracts, pension fund surpluses or deficits and reserves of property and casualty insurers.
Further, the panel has proposed that if a target or bidder offering securities as consideration publishes a net asset value or adjusted net asset value figure in circumstances where Rule 29 would apply if a valuation had been published in respect of the underlying assets, a valuation of such assets must be published in accordance with the requirements in Rule 29.
The panel has proposed that Rule 29 be amended to require valuers to:
- be independent;
- be appropriately qualified to give a valuation report on the relevant valuation (membership of a professional body will be an indicator of such qualification);
- satisfy any relevant legal or regulatory requirements; and
- have sufficient knowledge of each relevant market and the relevant skills and understanding to prepare the valuation report.
Specifically, the panel commented that it would normally consider a valuer to be independent if neither the valuer nor any party to the offer has a substantial economic interest in the other and the valuer is independent under its professional standards.
Requirements for valuation reports
The consultation paper recommends that a Rule 29 valuation published during an offer period should be required to be in the form of a valuation report. If such valuation is published before the start of the offer period, Rule 29 would require such valuation to be confirmed in, or updated by, a valuation report with such report included in the first announcement or document published during the offer period which refers to or draws attention to such historical valuation.
It also states that Rule 29 should set out detailed requirements relating to the contents of a valuation report (eg, the basis of valuation and details of the valuation standards). The purpose of such proposed amendments would be to reflect the current market practice as regards the form and content of a valuation report.
The panel has proposed to remove the requirement for a valuation to be current and to replace it with a requirement that:
- if the date at which the assets were valued is not the same as the date on which the relevant document or announcement containing the valuation report is published, that document or announcement must contain a statement by the directors of the target or bidder offering shares as consideration that the valuer has confirmed that an updated valuation would not be materially different; or
- if such statement cannot be made, an updated valuation must be published.
Finally, the consultation has recommended that if information contained in a Rule 29 valuation report could constitute a profit forecast under Rule 28, the panel should be consulted in advance of its publication.
Given that the consultation paper largely seeks to codify current market practice and the approach of the panel to asset valuations, if the code is amended in line with the proposals, such amendments are unlikely to have a material impact on transactions.
For further information on this topic please contact Will Pearce, William Tong or Joseph Scrace at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email ([email protected], [email protected] or [email protected]). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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