asic on soa's

My comments are merely intended as discussion points or prompts for deeper analysis by anyone with time or interest in the intervening few weeks.

Source http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg111-30032011.pdf/$file/rg111-30032011.pdf

Excerpts from Regulatory Guide 111 (2011)

Transaction - Schemes of arrangement

Circumstances:
The scheme company must commission an expert report when the other party to the scheme holds at least 30% of the voting shares of the scheme company or when they have common directors: reg 5.1.01 and sch 8, cls 8303, 8306 of the Corporations Regulations 2001 (Cth) (Corporations Regs).

Scheme companies often commission an expert report when transactions are complex or effect a takeover.

Comment: Who commissioned THIS report? IE the “scheme company”. The IE seems to refer to ESG as the scheme company, that is ESG commissioned the report. HC posters suggest (Buddy for one) ESG commissioned the report. Yet STO did not hold “30% of the voting shares” so they are not the ”other party”. Leaves me confused.


Control transactions by way of a scheme of arrangement

If an expert concludes that a scheme proposal is ‘not fair and not reasonable’, then the expert would conclude that the scheme is not in the best interests of the members of the company.

When a scheme of arrangement is used to acquire or increase a party’s control, the report should address the interests of members who are bound to give up rights under the scheme.

Comment: Clearly says not fair OR reasonable, BUT as per commissioning party IS in best interests etc. Clear contravention of ASIC guidelines?


Approval of a Sale of Securities

A specific issue the expert should determine is whether the vendor is to receive a premium for control.

The greater the control premium, the greater the advantages of the transaction to the non-associated holders would need to be to support a finding that the advantages of the proposal outweighed the disadvantages. These other advantages may come, for example, from a better long-term profit outlook as the incoming security holder offers superior management skills.

The expert should also inquire whether further transactions are planned between the entity, the vendor or any of their associates. If any are contemplated, the expert should determine whether those transactions would be on an arm’s length basis. If not, an implication arises that they may compensate a vendor for a price that is too low.

An expert should also consider whether any proposed acquisition by way of sale, if approved, might deter the making of a takeover bid for the entity.

Comment: Any Premium for Control (was it ever reflective of the benefit Santos truly reaps through Control of ESG?) has largely evaporated with market decline, as have “advantages to we non-associated holders” – thus “advantages do not outweigh disadvantages” as the IE states.

A further transaction IS planned, outside of or part of the SoA depending on developments. Should the CASH offer to TRU proceed, then logically it compensates the associated party in the event that market decline has disadvantaged the non-associated parties left with a scrip offer!

Comment: amongst holders on HC frequently suggested the likelihood of another offer materialising in the presence of the Santos proposal was lessened by comparison to an outright Takeover Bid.

Did the IE really address this in detail?


Choice of methodology

In applying the above methodologies, it would be open to an expert to have regard to the amount an alternative bidder might be willing to offer if all the securities in the target were available for purchase.

If changes in material assumptions are likely to materially impact on a report’s valuation , an expert should consider including a sensitivity analysis which sets out the impact of such changes.

Comment: The increase in resource irrespective of size, was not subsequently addressed by the IE, or a discussion on impact of flow rate over a near term pre-determined period entered into in his self-admitted broad attempt to value the resource.

Regarding alternative bidder scenario, the IE may have thought it a moot point as the days since all the securities in the target (ESG) where available for purchase are long gone due to the bidder’s blocking stake.


Value Ranges

An expert should usually give a range of values. The value of securities is typically subject to uncertainty and volatility. Placing a precise dollar value on them is likely to imply a misleading accuracy to a valuation.

Nevertheless, the range of values should be as narrow as possible. If an expert cannot give a narrow range because of uncertainty, the expert should prominently explain in its report what factors create this uncertainty and how the expert is able to justify its findings despite the uncertainty. In our view, a broad range of values undermines the usefulness of the report.

Comment: Whilst IE seems to have reasonably complied with this section, including a detailed explanation for his inability to narrow the range, ASIC twice suggests the report is “undermined” due to the IE ‘s inability to narrow it down.

Simply put, a straight bid, enticing counter competitive bids would have left the market to settle any uncertainty. (Oh, for a perfect world)


Clear, concise and effective communication

An expert report should help security holders make their decision. The report should:

(e) be as brief as possible.

Comment: Mmmm…no comment


Statements should be supportable

Review of information

We expect an expert to:

a) critically evaluate the information provided to it; and

(b) take note of any grounds held for questioning the truth, accuracy and completeness of the information.

The expert must review directors’ valuations and management accounts. If there are no indications of irregularities or omissions, an expert will ordinarily be entitled to take at face value valuations previously prepared by outside experts.

Comment: One wonders where the last 18 months of huff & puff by over enthusiastic Board releases come under IE’s brief – if at all.

BUT the above stipulations are ASIC’s, not mine and so in light of the fact Casey & another of ESG’s people were licenced to interpret data from their own wells prior to deciding to release to independent assessment, as above, are there any grounds for questioning whether these amateur calculations were inaccurate, but nevertheless used as the basis for numerous market releases which indisputably impacted on the investment decisions of thousands over a protracted period of time?

I repeat, ASIC states above,” The expert must review directors’ valuations…[for]…indications of irregularities or omissions…”


Changes in circumstances

An expert who has delivered its report to the commissioning party should notify that party as soon as possible if the expert becomes aware of a significant change affecting the information in its report or if the expert believes that a material statement in the report is misleading or deceptive.

When a material change in circumstances has arisen since a report was prepared, a failure by the expert to provide a supplementary report to its client may constitute misleading or deceptive conduct. Security holders will rely on an expert report when making their decision, not when they first receive the report:

If an expert becomes aware of a material change in circumstances, then depending on the circumstances, it may be appropriate for a commissioning party to send a supplementary report, even if security holders would receive the report:

a) shortly before a meeting is held; or

b) towards the end of an offer period.

Changes affecting valuations in reports are more likely to trigger the supplementary report obligation than tactical events in the progress of transactions, for example, the level of acceptances in a bid.

Comment: In summary, the above contends that changes in reserves / info on flow rates which if included in his original assessment could have altered his valuation range, and by extension an investor's voting decision under the SoA, may trigger an obligation on the IE to submit a supplementary report to the commissioning party.


Regulatory action

We will consider regulatory action if we consider that there are material issues with the content of the report.

We might take enforcement action without consulting the expert or the commissioning party.

The action we might take could be one or more of the following:

(b) in a scheme of arrangement, opposition to the scheme at a court hearing;

Comment: Make no mistake, they have the power.


Disclaimers

The purpose of an expert report is to give security holders an assessment on which they can rely. A disclaimer defeats this purpose.

An expert cannot limit its statutory liability for the report through disclaimers (e.g. that the expert will not be liable for any loss incurred through reliance on its report). An expert report that purports to exclude the expert from liability may be misleading.

Comment: A lengthy disclaimer is found at 10.2 page 149 of Scheme Booklet. ASIC, above, twice state their distaste for a report “relying” on such qualification.

To be fair, Samuels appears to adequately clarify the purpose for which the report is commissioned and subsequently prepared. However, the extra length and detail of his disclaimer begs the question, will ASIC view this with some suspicion?

NB The opinions expressed are my own and unqualified. Any interpretation of selected ASIC information may be flawed and this post is intended for stimulated discussion and further exploration, rather than the basis of an investment decision.

Lilac