Getting what you pay for

By BRUCE SHEPPARD

Independent appraisers are entrenched as part of the corporate landscape, and from time to time shareholders will receive reports on various transactions proposed by management and others.

These reports are not required under the Companies Act 1993; rather, they are required under the Stock Exchange Listing Rules and the Takeovers Code.

Shareholders of listed companies and code companies subject to a takeover will receive these reports and are, of course, indirectly paying for them. The question is, are shareholders getting value from these reports?

Set out below is a table of reports prepared for shareholders over the last 18 months showing the author of the reports and the report outcome.

On the face of it these reports appear to counter the proposal 22 per cent of the time indicating a measure of impartiality or independence. However, in respect of certain transactions this is far from the reality.

The second table is a table of the subject matter on which the reports were issued and the recommendations made. Some reports cover all three subject matters, hence, the number in this table is higher than the total number of reports issued.

As this table demonstrates, not a single report in the last 18 months has recommended to shareholders that a management sponsored major, or related party transaction, should be rejected.

When the report is on executive remuneration or option schemes I cannot recollect a report that recommends to shareholders that a proposal should be rejected.

So if these reports are almost always supportive of management what use are they to shareholders that are paying for them?

Grant Samuel's report on the Fletcher Forests transaction is a typical report, and worthwhile to analyse. Firstly, because it was completed by an appraiser with the largest market share and, second, as it encompassed many of the issues that a reporter is required to report on.

The report was 51 pages. Very roughly, six pages were scoping the report and defining the legislative requirements, two pages were devoted to disclaimer, disclosure and indemnity issues, eight pages were devoted to an industry overview which was not included elsewhere in the management information provided to shareholders and the balance was a recasting of information already available elsewhere in the company's document.

In short, less than 20 per cent of the report by volume was information not included elsewhere and might have been useful to shareholders in gaining an understanding of the industry in which they were already invested.

Remember, shareholders have paid for this report so the disclaimers are particularly interesting:

* "4.1: Grant Samuel's opinion should not be construed as a recommendation as to whether or not to vote in favour of the resolutions."

* "4.3: Grant Samuel expressly disclaims any liability to any FC shareholder that relies or purports to rely on this report for any other purpose."

The purpose is to express an opinion, not a recommendation. The report is addressed to shareholders and paid for by them but any liability is disclaimed!

* "7.5: FC Forests has agreed that to the extent permitted by law, it will indemnify Grant Samuel and its officers in respect of any liability suffered or incurred as a result of or arising out of the preparation of this report."

So, even if they do become liable to a shareholder arising from the report, however unlikely, shareholders will be paying themselves under the indemnity.

Don't be alarmed. This is usual for all such reports.

Inevitably, these reports are prepared based on information provided by management.

For example, in the report done in relation to the IT Capital transactions, Grant Samuel obtained from management a confirmation that management had given them all relevant information related to the transactions. But how can anyone outside the company judge what that confirmation was worth?

Unfortunately, if it is up to management to decide what is relevant, not the appraiser, there is always going to be a risk of a garbage in and garbage out situation.

On the face of it these reports are useful in takeover situations, but in other situations of limited use.

It would be helpful if the appraisers decided what was relevant, not management. Management should of course be on penalty for non-disclosure of all information.

It would also be useful if the reporters were liable to the people paying them and to whom the report is addressed. Perhaps then shareholders would feel more certain of the opinions offered.