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 going private are fair. It is rendered for a fee. [ [http://www.investorwords.com/1879/fairness_opinion.html "Definition, Fairness Opinion", "Investorwords.com".] ] [ [http://www.inc.com/articles/2001/02/22138.html Ralph Ward, "A Briefing On Fairness Opinions", "Inc.com" (February 2001).] ]

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 [ [http://www.cfo.com/article.cfm/5465857 Marie Leone, "Fairness Opinion Neutrality Questioned", "CFO.com" (February 2, 2006).] ] . Directors and officers of the companies also may have an interest in the outcome of the proposed transaction. In response, the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers) issued its Rule 2290 to require disclosure by its members to minimize abuses [ [http://www.cahill.com/news/memoranda/0000057 Cahill Gordon & Reindel, "FINRA Rule 2290: Required Disclosures in Fairness Opinions" (November 6, 2007)] ] ; this was approved by the Securities and Exchange Commission [ [http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p037445.pdf "Fairness Opinions: SEC Approves New NASD Rule 2290 Regarding Fairness Opinions", FINRA Regulatory Notice 07-54. Effective Date: December 8, 2007.] ] .

Equity and fairness

Stockholder lawsuits are in the courts [ [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=881109 Steven M. Davidoff, "Fairness Opinions", "American University Law Review," v. 55, p. 1557.] ] . The Delaware Court of Chancery has required sufficient disclosures to “provide a balanced, truthful account of all matters” ["Malone v. Brincat," 722 A.2d 5, 12 (Del. 1998)] 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.” ["In re Pure Resources, Inc. S’holders Litig.," 808 A.2d 421 (Del. Ch. 2002), pp. 447-8.] 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.” [ [http://courts.delaware.gov/opinions/(0mbwu1yseqke13vour2vljjc)/download.aspx?ID=98980 "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).] ] First empirical evidence of fairness opinions in Europe indicates their relevance for shareholders [ [http://ssrn.com/abstract=1071722 Sebastian Lobe, and Nils-Christian Schenk "Fairness Opinions and Capital Markets: Evidence from Germany, Switzerland and Austria", 2008] ] .

References