Proposed Changes to Rule 29 of the Takeover Code
In October 2018 the UK Takeover Panel issued a Public Consultation Paper with its proposals for replacing the existing Rule 29 of the Takeover Code, “Asset Valuations”. Comments are required before 7 December.
The Panel says that the changes are to better reflect current practice and are not intended to materially change the way in which the Rule is currently applied. Many of the changes are simplifications of the current wording, achieved by focussing on the required principle rather than the detailed process. As with any simplification the changes are generally welcome. However, from a valuation professional’s perspective there are a few changes that are significant and one that could present challenges in practice.
A summary of the main changes is below. Our more detailed observations can be found in our Comment Letter to the Panel.
1) When does Rule 29 Apply?
A significant change is that the Rule can now be applied retrospectively. The existing Rule simply provides that any valuation referred to in connection with an offer must be current, or if not current the valuer must make a statement that a current valuation would not be materially different. It is now proposed that the Rule should apply to any valuation published by an offeror or offeree:
During the offer period,
During the 12 months prior to offer period if it is referred to in connection with the offer OR is considered material to the offeree’s shareholders.
More than 12 months before offer period if it is referred to in connection with the offer.
There is an exception for valuations published in financial statements only as a result of accounting practice and which are not referred to by the relevant party in connection with the merits or demerits of the offer.
Comment: In the second or third situation a valuer will not know that their valuation may be used or quoted in connection with future takeover proceedings, nor the identity of the other party to those as yet unknown proceedings. This presents a potential problem for valuers. If asked for confirmation that a previous valuation may be referred to in connection with the offer and that an updated valuation would not be materially different, the valuer would be compromised if it had a material involvement with the other party which was irrelevant or unknown at the time the first valuation was commissioned.
2) Current Valuation
The existing Rule requires the valuer to state that a current valuation would not be materially different if the valuation is not current. The proposed new rule amends this to provide that offeror or offeree must include a statement that the valuer has confirmed that an updated valuation would not be materially different if the valuation referenced is not on the same date as that on which the document or announcement is published.
Comment: This subtle change removes the question of for how long a valuation remains “current”. Now a statement is required whenever the valuation date precedes the date of the offer document or circular. This is far more realistic than attempting to set an arbitrary time limit on what constitutes “current” given that market conditions can change overnight due to unforeseeable events. Because the valuation will be invariably be prepared ahead of its publication this means that a statement will be required in most cases. However, by placing the responsibility for the statement on the offeror or offeree a formal statement no longer needs to be prepared by the valuer so a simple exchange between the party and its valuer on the date of publication will suffice.
3) Types of Asset:
Because Rule 29 has mainly been used for valuations of property, plant, equipment, mineral, oil reserves, gas reserves and unlisted securities these are now the only asset categories listed to which the Rule applies. Currently contracts, stocks, intangible assets and individual parts of a business are also included. The proposed rule includes provision for the Panel to apply the Rule to any other types of asset (or liability), but it does not consider it possible or desirable to list everything to which it should apply.
Comment: While the point about the impracticality of listing every type of asset to which Rule can be applied is valid, it is surely a mistake to omit any reference to intangible assets. These are frequently of far greater value than property, plant and equipment, especially for companies in the science and technology sectors. The genre of “Intangible assets” covers a vast range of items that create value in a company such as brands, customer relationships, customer lists, assembled workforce, patents, research, etc, etc. We agree listing all these individual asset types is impractical and unnecessary, but if the Panel does not give a clear indication that valuations of such a potentially significant genre of assets is frequently necessary in mergers and acquisitions and subject to Rule 29 it risks giving the impression to prospective offerors that intangibles are regarded as less significant than physical assets. This could also affect the wider perception of the UK as a suitable listing location for businesses rich in intangibles.
4) Who can Value?
It is proposed to make the requirements for the valuer less prescriptive. The current Rule requires a valuer of land, buildings, plant or equipment to be a member of either RICS or IRRV, and in respect of other assets an appropriately qualified person approved by the Panel. It is proposed to replace this with a much simpler provision that the valuer must be sufficiently independent, appropriately qualified and have necessary knowledge, skills and understanding. Only if there is any doubt that the valuer a party is proposing to use meets these criteria does the Panel need to be consulted.
Comment: This simplification is welcome, and the removal of the RICS and IRRV requirement for valuers of property, plant and equipment is consistent with the intention that the Rule should be applicable to other types of asset or liability, for which there is no requirement to belong to a named professional body. It also reflects the fact that companies listed in the UK are increasingly likely to have substantial assets overseas, so stipulating just two UK based professional bodies is unduly restrictive.
5) Applicable Standards:
The current Rule refers only to the RICS Valuation Standards. The proposed new Rule requires a valuation to be prepared under the valuation standards issued by either the RICS or the IVSC, or in accordance with any other professional standards approved by the Panel.
Comment: This broadening of the applicable standards is welcome, and consistent with the fact that many assets be based outside of the UK. In practice the International Valuation Standards (IVS) provide standards that include all major classes of asset and liability, and the RICS standards incorporate the IVS with supplementary provisions reflecting their members' particular areas of practice.
6) Other Changes
Some minor changes are proposed to other Rules that cross reference Rule 29. These are merely alterations to the language to reflect the proposed new rule. Examples include changing references to the “independent valuer” to simply “valuer” (reflecting the fact that Rule 29 sets the independence criteria for the valuer) and references to the “valuation certificate” or “opinion on value” to “valuation report”.
Comment: These changes have no practical consequences but reflect the overall updating and simplification of the valuation requirements under the Code.