A
fairness opinion is a
professional evaluation by an
investment bank or other third party as to whether the terms of a merger,
Takeover,
Share repurchase, spin-off, or
Private equity are fair.
It is rendered for a
fee.
[ Ralph Ward, "A Briefing On Fairness Opinions", Inc.com (February 2001).] 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,
as well as in circumstances other than mergers, such as a corporation exchanging debt for equity.
[Jill R. Goodman[6] New York Times Dealbook] Some of the specific functions of a fairness opinion are to aid in decision-making, mitigate risk, and enhance communication.
Controversy
Controversy in
financial and
management circles surrounds the question of the objectivity of fairness opinions, as one aspect of the
Fiduciary duty 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.
[ Marie Leone, "Fairness Opinion Neutrality Questioned", CFO.com (February 2, 2006).] Directors and
Corporate titles of the companies also may have an interest in the outcome of the proposed transaction.
[ 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)] 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;
[ "FINRA Rule 2290: Required Disclosures in Fairness Opinions", Cahill Gordon & Reindel, (November 6, 2007)] this was approved in 2007 by the Securities and Exchange Commission.
[ "Fairness Opinions: SEC Approves New NASD Rule 2290 Regarding Fairness Opinions", FINRA Regulatory Notice 07-54. Effective Date: December 8, 2007.]
Equity and fairness
In the United States, in the context of
stockholder lawsuits,
[ Steven M. Davidoff, "Fairness Opinions", American University Law Review, v. 55, p. 1557.] 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”
[ 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: “Stockholders 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.”
[ 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).] According to the certification hypothesis fairness opinions may also serve the interest of the shareholders by mitigating informational asymmetries in corporate transactions.
[ Pierfrancesco LaMura, Marc Steffen Rapp, Bernhard Schwetzler, Andreas Wilms, “The Certification Hypothesis of Fairness Opinions”, 2009)]
