ASIC has this week issued a consultation paper seeking public feedback on its proposal to update its guidance notes relating to the content of experts' reports (Regulatory Guide 111) and the independence of experts (Regulatory Guide 112).

The document, Consultation Paper 143, sets out ASIC's proposal to address what it sees as deficiencies in experts' reports, particularly in the context of takeovers.

Apart from clarifying ASIC's view on the considerations that an independent expert should make reference to in coming to the view that a transaction is "fair and reasonable", ASIC proposes the following:

• Experts should not use a discounted cash flow (DCF) methodology to value an asset where it is a start up or potential development, unless the expert believes that there is a reasonable basis to conclude that the proposed development will proceed. In particular, ASIC says that where minerals or hydrocarbon developments are concerned, an expert would need to explain why they have used a DCF methodology where the relevant assets are classified as lower than a "reserve category".
• Reports will need to have been prepared in accordance with normally applicable standards and guidelines (including, in the case of resources, the Valmin Code).
• Specific disclosures should be made in experts' reports where the expert has previously provided a report on the asset (or a substantial component of the asset) that is the subject of the new report.
• Independent experts should be restricted from providing conclusions to the engaging company prior to issuing a final report.

The proposals, if implemented, have the potential to impose significant pressure on independent experts in accepting engagements on behalf of, for example, emerging resources companies (for example, part of a takeover defence), where the use of a DCF methodology may come under close scrutiny by ASIC. Where experts consider that the DCF methodology can be used despite the early stage of a project's life cycle, it is clear that there will need to be explicit disclosure of the reasons surrounding the use of that methodology. This explanation will no doubt be closely scrutinised by the regulator and (in the context of the takeover) bidders alike.

These changes have the potential to detrimentally affect the way a company is able to report the perceived value of a start-up or development project to shareholders.

ASIC is seeking public comments on the proposal by 17 December 2010. On current timing, it is proposed that a formal guidance note will be issued in March 2011, following completion of the public consultation program.

For more information on the consultation paper and its possible impact, please contact HopgoodGanim's Corporate Advisory and Governance team.

Michele Muscillo, Partner