New guidelines on independent financial advisers released after concerns mount

SINGAPORE - The Singapore Exchange Regulation (SGX RegCo) on Monday released new guidelines on independent financial advisers (IFAs) and their opinions, as well as the roles company directors play in procuring such advice.

The Guide on Independent Financial Advisers is a starting point to improve the standards, clarity and consistency of advice that IFAs render in their opinions, the regulator said.

Its release comes after recent privatisation offers by the major shareholders of several SGX-listed companies were criticised as unfair to minority shareholders,

prompting public scrutiny on the roles of IFAs and subsequent action from the authorities.

Among the issues under contention is what constitutes a fair and reasonable exit offer to shareholders.

Under current listing rules, in the event of an exit or delisting offer, an IFA must be appointed by the target company to ensure that the offer made is fair and reasonable to shareholders.

In the new guide, SGX RegCo said an offer is “fair” if the value of the offer price is greater than or equal to the value of the securities subject to the offer. Securities are tradeable financial assets such as shares in a company.

When considering whether an offer is “reasonable”, an IFA should give regard to matters including the concentration of pre-existing voting power in the securities of the issuer, the market liquidity of those securities and the likelihood of an alternative offer being made.

An offer can be “fair and reasonable”, “not fair but reasonable”, “not fair and not reasonable” or “fair but not reasonable”.

An offer would normally be considered “reasonable” if it is assessed to be “fair”, SGX RegCo said.

“Hence, an opinion that an offer is ‘fair but not reasonable’ should not be given unless there are strong and exceptional grounds.”

Under SGX RegCo’s framework, it is possible for an IFA to recommend that shareholders accept an offer even if it is of the view that the offer price is too low, or not “fair”, the regulator said.

This is because there may be other factors including illiquidity in the company’s shares such that an offer provides an exit opportunity to shareholders that might not otherwise be available and outweighs price consideration.

If an exit offer is made in connection with a delisting proposal, the exit offer needs to be both “fair” and “reasonable” in order to comply with the voluntary delisting requirements.

Accordingly, a “not fair but reasonable” exit offer, even if the IFA recommends acceptance, would not meet such requirements.

Another concern raised by stakeholders is the valuation methodologies used by an IFA to analyse an offer.

“Given the variance and multitude of transactions, it is not possible to prescribe exhaustively the methodology that an IFA should use,” SGX RegCo said.

In this regard, an IFA is expected to exercise its own skill and professional judgment and be prepared to justify the choice of methodology used.

SGX Regco said that as far as possible, IFAs should compare figures derived from the use of more than one methodology and ensure that its opinion states the reliance, and reasons for such reliance, that the IFA has placed on each methodology, among others.

Based on its observations of queries raised on IFA opinions, SGX RegCo noted that an opinion typically comes under increased scrutiny by investors when the offer price is below the net asset value (NAV) per security, or its revalued NAV per security.

Where the IFA has chosen an asset-based valuation approach, and the offer price is below the NAV per security or the revalued NAV per security, the IFA should explain clearly the fairness and reasonableness of the offer when queries are raised. 

SGX RegCo added that should there be any material changes to the traded price of an issuer’s assets since announcements were made in relation to a proposed exit offer, the IFA should include and consider these changes in its opinion.

The guidelines also include SGX RegCo’s expectations of directors when appointing IFAs.

It noted that directors are now expected to evaluate for themselves whether the professionals involved in preparing and approving the IFA opinion have the relevant experience to do so and whether there is information that casts doubt on their competency, the quality of advice and their resourcing.

The target company involved in an exit offer should also provide the IFA with unimpeded access to persons, premises, documents, reports, information and valuations required to undertake its analysis and that all the information provided contains the necessary disclosures for the IFA to issue its opinion.