Commentary: Independent financial advisers can no longer hedge their bets when giving opinions

Date: November 2, 2018

First published in The Business Times on 2 November 2018

In recent months, property firm Wheelock Properties and Norwegian shipyard Vard Holdings were subject to privatization offers that involved seemingly confusing and possibly contradictory advice from their respective Independent Financial Advisers (IFAs) to their boards. Going forward, if IFAs are to properly serve minority shareholders who are the ultimate recipients of IFA advice, a closer study of the two cases should prove useful.

Before delving into either case, it’s worth noting that in February last year, the Securities Industries Council (SIC) which administers the Singapore Code on Takeovers and Mergers, amended its 2014 Practice Note that sets out the guidance on the advice to be given by Independent Financial Advisers (IFAs) in connection with takeovers, whitewash transactions and transactions which fall under the ambit of the Code.

The advice is usually intended for the offeree company’s boards and through them, is transmitted to the offeree’s shareholders as to whether to accept or reject the offer.

SIC’s intention behind issuance of the 2014 Practice Note was to try and clarify the meanings of the various permutations of the words “fair, not fair, reasonable and not reasonable’’.

The Feb 2017 update in the meantime, reminded financial advisers of the need for the IFA opinion to be clear and unequivocal. It stated: “If an IFA makes a recommendation on an offer, the recommendation should be to either ‘accept’ or ‘reject’. The recommendation should not be to accept under certain conditions, and to reject under other conditions. Accordingly, recommendations should also not be conditional. This is important to help shareholders, in particular lay investors, understand and rely on the advice.”

The meaning and intent of the preceding statements is clear – because lay investors will rely on the guidance of IFAs, there can no longer be any hedging of bets through the provision of ambiguous recommendations.

The Wheelock example

To see this, consider for example that the IFA to the takeover-cum-privatization offer for property firm Wheelock Properties initially said in August this year the terms of offer were “fair and reasonable, but not compelling, and are not prejudicial to the interests of minority shareholders”.

A week later, most probably in response to adverse market reactions – and possibly confusion among minority shareholders – the IFA issued a revised opinion that simply said the offer was “fair and reasonable’’, and said that it recommended that the directors advise shareholders to accept the offer unless they could secure a higher price by selling their shares in the market. Perhaps, this would serve as an abject lesson for all IFAs to make recommendations only after carefully considering their conclusions and to observe the SIC practice note guidance.

Anecdotal evidence from the market is that adding the words “but not compelling etc…’’ amounted to making the recommendation conditional, and so qualified the recommendation in such a way that it did not “help shareholders, particularly lay investors, understand and rely on the advice’’.

Fair enough. Equally fair however, given the Wheelock scenario, is a fair question from some quarters as to whether some words are allowed and others are not, and if so, whether SIC should let the market know what is permitted.

Going by the Wheelock episode, it appears that no deviation from the four permutations set out in the practice note is allowed, and that when one of the four is rendered, it has to be accompanied by a firm “accept’’ or “reject’’ recommendation. There is, therefore, no more scope for IFAs to indulge in their past practice of couching their recommendations in ambiguity.

In other words, Wheelock should be seen as a signal to IFAs that they have to adhere strictly to the need for their advice to be clear and unequivocal. If so, then this is very welcome as it would go a long way towards addressing the confusion among minorities that occurs when presented with a recommendation that might read as one thing but actually could mean another.

The Vard example

On this latter point, it’s worth noting that a month before the Wheelock recommendation, the IFA for the Vard Holdings takeover-cum-privatisation said the offer was “not fair but reasonable’’ and so recommended to the independent directors that shareholders accept it.

Although saying something is “not fair but reasonable’’ might appear contradictory at first glance because the Cambridge dictionary defines “fair’’ as “treating someone in a way that is right or reasonable…’’ it was actually in line with the SIC’s guidelines, which states that “fair’’ and “reasonable’’ have to be treated as two separate concepts.

It required careful further reading of the SIC’s Practice Note and the IFA’s explanation to understand the logic of this seemingly contradictory opinion. According to SIC, whether or not an offer is “fair’’ is arrived at after comparing the offer price with the value of the target securities. In other words, a quantifiable benchmark is used to determine fairness. So in Vard’s case, one metric used to say the offer was “not fair’’ was that the price was a discount to the company’s net asset value or NAV.

However, it was deemed “reasonable’’ because of various other non-quantifiable factors, such as the absence of an alternative offer, the absence of dividends since 2012 and that the price/NAV implied in the offer was in line with the corresponding ranges of other, comparable companies.

IFAs would do well to study the nuances contained in the wording of both offers and remember that their advice has to be clear and understandable to minority shareholders.

Finally, SIAS would like the authorities to address the concerns of end users of IFA reports as to the true independence of the IFAs because their appointment and payment for services are by the company. However, if the present practice of companies appointing IFAs is to continue, then there should be full disclosure of the appointment process i.e. how many IFAs were interviewed any way were found unsuitable. Alternatively, a neutral body should take charge of the assignment.

  • The writer is David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)