Some proposals to ensure that independent experts are really independent!

or how to ensure that minority shareholders are correctly protected during forced take outs!

Hello,

the latest decision from the AMF (French regulator) to refuse to recognize as independent an expert is a massive decision and marks a big progress.

The AMF gave us some criterias to determine the independence of an expert:

• how much does the client represent in the sales of the independent expertise BU of the expert designated to do the independent report?

  In the present decision this client represented 14% of the independent expertise BU and 20% when including the current independent expertise.

• an independent expert has to be transparent and say how important the client is in the sales of the independent expertise BU

• an independent expert has to indicate all the independent expertise he did including the most recent ones and including those where the client is a big minority shareholder

• an independent expert should answer to the observations put forward by the shareholders concerning the independance of the expert

My reading is that an expert cannot base a big part of his or her business on independent expertise. It should be a one off and an expert should not always be serving the same client.

At the end of the day, these are logical, reasonnable and fair points. And just a reminder as to what it is to be a truly independent expert.

What more can be done to improve the independence of an expert? Here are some ideas to keep going in the right direction and reinforce their independence:

• independent expert could be paid by all the shareholders of the company (reduced dividend…),

• independent expert could be paid by the AMF which could levy a tax on all quoted companies which would form a dedicated budget to pay for independent experts.

• impose a forced turnover in the companiess realizing the independent expertise. In such a way, it i the AMF which would chose the independent expert and not the company which decides and nominates the expert.

• diversify the pool of experts who can do these expert reports. When one looks closely it always seem the be a small group of experts who end up doing the reviews…

• maybe use some other european independent experts who will have a fresh look at the company and would be less biased when analyzing a company.

• an independent expert cannot do all the independent reports concerning a company,

• if a client/company which is asking for the independent expertise represents more than 10% of the independent expertise BU it is a no go to select this expert. It could be interesting to go to see how much it represnets of the sales of the partner in charge of the expertise as well.

• minority shareholders have to be seen by the independent expert. Minority shareholders tend to know their companies really well.

• No cherry picking done by the independent expert. The expert cannot chose the questions of the minority shareholders he wishes to answer to. The expert needs to answer to all the questions as in effect he is working for all the shareholders of the company.

I think they should also be some rules surrounding the valuation methods especially so when it concerns forced take outs where there is an expropriation of the shareholders.

• share price can never ever be used as a justification to say that it represents the fair value of an offer. Doing this is just negating the role of the stock market which would have in effect no meaning to exist,

• for holdings, the strict minimum for a fair valuation has to be book value per share,

• it is necessary to take into account the price up too which a company has been buying back its own shares for the last 2 years. If a company is buying back shares at a higher price than the share price used to determine the fair value of an offer well then it seems that something is wrong.

• for a holding, a holding discount cannot be applied when it is a forced take out.

• when looking for comparables, experts should chose real comparables. It is not possible to compare a holding which has 3 holdings with holdings which have multiple holdings in lots of different companies.

• using the share price targets given by the financial analyst is a good basis but not enough.

• it is not possible to use liquidity discounts when we are in a forced take out offer as it is an expropriation.

• cash is cash and as such cannot have a disscount applied to it.

This list isn’t exhaustive and I will add some as times goes by!

Counting on you to spread the word!

Cheers!

Jeremy