Fairness opinion

A fairness opinion is a professional evaluation by an investment bank or other third party as to whether the terms of a merger, acquisition, buyback, spin-off, or privatization are fair.[1] It is rendered for a fee.[2][3] They are typically issued when a public company is being sold, merged or divested of all or a substantial division of their business. They can also be required in private transactions not involving a company that is traded on a public exchange,[4] as well as in circumstances other than mergers, such as a corporation exchanging debt for equity.[5] Some of the specific functions of a fairness opinion are to aid in decision-making, mitigate risk, and enhance communication.[6]

Controversy

Controversy in financial and management circles surrounds the question of the objectivity of fairness opinions, as one aspect of the duty of care in the fairness of a transaction. A potential exists for a conflict of interest when an entity rendering an opinion may benefit from the transaction either directly or indirectly.[7] Directors and officers of the companies also may have an interest in the outcome of the proposed transaction.[8] In response, in the United States, the Financial Industry Regulatory Authority (then the National Association of Securities Dealers) issued its Rule 2290 to require disclosure by its members to minimize abuses;[9] this was approved in 2007 by the Securities and Exchange Commission.[10]

Equity and fairness

In the United States, in the context of stockholder lawsuits,[11] typically relating to the sale or merger of a public company, the Delaware Court of Chancery has required sufficient disclosures be made to a board of directors and shareholders to “provide a balanced, truthful account of all matters”[12] and said “When a document ventures into certain subjects, it must do so in a manner that is materially complete and unbiased by the omission of material facts.”[13] In a Memorandum Opinion in the CheckFree/Fiserv merger Chancellor Chandler underlined that the earlier In re Pure Resources Court had established the proper frame of analysis for disclosure of financial data: “[S]tockholders are entitled to a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely.”[14] According to the certification hypothesis fairness opinions may also serve the interest of the shareholders by mitigating informational asymmetries in corporate transactions.[15]

References

  1. ↑ "About Fairness Opinions | JPKatz", JPKatz.com.
  2. ↑ "Definition, Fairness Opinion", Investorwords.com.
  3. ↑ Ralph Ward, "A Briefing On Fairness Opinions", Inc.com (February 2001).
  4. ↑ "Fairness Opinion in private transactions", Blackpartners.pl.
  5. ↑ Jill R. GoodmanNew York Times Dealbook
  6. ↑ Ferro, John; Benoit, Bryan. "Raising the Bar for Fairness Opinions". Transaction Advisors. ISSN 2329-9134.
  7. ↑ Marie Leone, "Fairness Opinion Neutrality Questioned", CFO.com (February 2, 2006).
  8. ↑ Yasuhiro Ohta and Kenton K. Yee, "The Fairness Opinion Puzzle: Board Incentives, Information Asymmetry, and Bidding Strategy," Journal Of Legal Studies 37.1, pp. 229-272 (January 2008)
  9. ↑ Cahill Gordon & Reindel, "FINRA Rule 2290: Required Disclosures in Fairness Opinions" (November 6, 2007)
  10. ↑ "Fairness Opinions: SEC Approves New NASD Rule 2290 Regarding Fairness Opinions", FINRA Regulatory Notice 07-54. Effective Date: December 8, 2007.
  11. ↑ Steven M. Davidoff, "Fairness Opinions", American University Law Review, v. 55, p. 1557.
  12. ↑ Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998)
  13. ↑ In re Pure Resources, Inc. S’holders Litig., 808 A.2d 421 (Del. Ch. 2002), pp. 447-8.
  14. ↑ In re CheckFree Corp. S’holders Litig., C.A. No. 3193-CC (Del. Ch. Oct. 18, 2007), Memorandum Opinion, Consolidated Civil Action No. 3193-CC (November 1, 2007).
  15. ↑ Pierfrancesco LaMura, Marc Steffen Rapp, Bernhard Schwetzler, Andreas Wilms, “The Certification Hypothesis of Fairness Opinions”, 2009)

Example Fairness Opinions (SEC filings) relating to the merger of Merck & Co., Inc. and Schering-Plough Corporation:

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