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Summary
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 Used
in most public company M&A transactions
to help establish that the board's
decision
was properly informed,
thus fulfilling the board's fiduciary duties
Became
a standard practice following
Smith v Van Gorkom decision
1985
- For selling companies
- For buying companies when transaction is
significant
- See
DGCL §141(e) - Board's reliance on
expert opinions
Fees
for opinion are usually separated from any contingent transaction advisory fee
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Developments
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To
address concerns over conflicts, many M&A deals
- Now have a second firm provide an opinion
- Now have different triggers for payment of bankers
fees
than prior practices
- See Precedent
below
In
re Tele-Communications (Del Ch 2005)
- Opinion may affect fairness opinion practices
- Court found that financial advisor getting a
large contingent fee put its independence into question
NASD
proposes new Rule 2290 below
 New
fairness opinion settles NYSE dispute
- Citigroup issues new fairness opinion
- Settles challenge to NYSE - Archipelago merger
over Goldman Sachs conflicts
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NASD Rule 2290 Proposed Rule
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NASD
proposes new Rule 2290
- Would require specified disclosures and
procedures for the issuance of fairness opinions by NASD member firms
- To address concerns over conflicts of interest
Latest
NASD Rule Filing 2006
 Summary
index
- Text of proposed rule
I
- Purpose
II.A.1
- Statutory basis
II.A.2
- Burden on competition
II.B
- Statement on comments received
II.C
◊ What constitutes a conflict of interest?
II.C-A
◊ To whom should disclosure be made?
II.C-B
◊ Verification
II.C-C
- Policies and procedures
II.D
◊ Fairness opinion committee
II.D.1
◊ Valuation
II.D.3
◊ Relative compensation
II.D.3
- Other comments
II.E
- Effective date
III
- Additional comments solicited
IV
Prior
NASD rule filings 2005-2006
- NASD modified the scope of the proposed rule
change and made certain clarifications to the rule text following discussions
with SEC staff
- NASD added clarifying language to the rule text
following discussions with Commission staff.
- Technical amendment and replaced and superseded
the original filing, as amended, in its entirety
Initial NASD proposal 2004
Comments
letters received by NASD
Commentary
SEC_CODE_REF_0090001192884
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"Fairness from a financial point of view"
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Not
inherent fairness /
not necessarily the highest price attainable
Instead,
shows a range of reasonable values based on different methodologies Typically
the deal price is expressed as a
multiple of the company's earnings or revenues
- Multiple is compared to that of comparable companies and comparable
transactions
Projected
cash flows may also be discounted
to a net present value
- Then compared to deal price
Deal
price may also be compared to
historical trading values For
mergers of equals, "give / get" comparisons
may be made
- % of earnings / revenues / book value contributed vs.
pro forma ownership in the resulting company
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Form of Letter
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Addressed
to the Board, not to the stockholders Specifies
the terms of the transaction
Lists
what financial advisor has reviewed
Discloses
potential conflicts, including:
- Fees
for the opinion and fees for services in connection with the transaction
- Past services to any party to the
transaction
- Any Board membership
- That financial advisor and its employees
may have short or long position in the Companys stock
Includes
paragraph rendering opinion, without analysis
- Analysis is instead included in detailed presentation to the board
- Analysis is summarized in proxy
statement, if shareholder vote is required
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Typical qualifications
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Have
not independently verified any information Assumed
the accuracy and completeness
of all information
No
appraisal or inspection of particular assets
Assumed
the financial projections were prepared
in good faith, upon reasonable estimates
and
represent managements best judgment as to the future Intended
for use of Board and may not be
referred to or published without consent Did
not take into account the effect of known contingencies
e.g. lawsuits, changes in regulation Speaks
only as of its date with no duty to update Not
a recommendation as to
how stockholders should vote Does
not address relative merits
compared to alternative transactions
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SEC Issues
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Fairness
opinion is typically filed with SEC
SEC
will want any projections given to other party's financial advisor included in
the disclosure document
- Usually
satisfied with two years of projections
- Should not have to disclose projections that were
only given to the
companys own advisor
(and not disclosed to the other side)
SEC
looks for tabular presentation and
specific identification of valuation ranges
for each method of analysis SEC
may seek qualitative explanation
when transaction value is outside a valuation
range
SEC
may challenge any disclaimer that
shareholders may not rely on the fairness
opinion
- Request that the disclaimer be deleted,
including from the opinion itself
- Asserting that it is inconsistent with company's other disclosure about the
fairness of the transaction to the companys shareholders
- If disclaimer is not deleted, SEC staff
will require the disclosure document to explain why shareholders cannot rely
on the opinion and whether the financial advisor will assert the disclaimer
as a defense to shareholder claims, whether governing law has addressed the
issue, and that the disclaimer will have no effect on the companys or
financial advisor's responsibilities under federal securities law
- SEC statement on fairness opinion
disclaimers
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"Going Private" Transactions
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Reg M-A Item 1015
- Requires public disclosure of banker board book
in Rule 13e-3 going private transactions
Description
of fairness opinion should be included
in the summary section of the disclosure
document SEC
will often ask for board books
to be filed as an exhibit and
summary of books to
be included in disclosure document
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Liability Issues
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Law is in flux, with several
theories of liability:
Breach
of fiduciary duty
- Some NY courts have
gone so far as to find this despite express contractual provisions to the
contrary
Negligent
misrepresentation
- Plaintiff needs to
show
reasonably foreseeable reliance on opinion
Agency Duty
to update
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Notable Cases
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Smith v Van Gorkom (Trans Union) (Del 1985)
- Seminal case endorsing use of fairness opinions
In re Unocal Exploration (Del Ch 2000)
- Bring down fairness opinion not required
Minzer v Keegan (2nd Cir 1999)
- Dismissing
claim of misleading proxy disclosure
re: fairness opinion
In re Pure Resources Inc (Del Ch 2002)
- Target corporation must disclose financial analyses underlying fairness
opinion
- As a matter of state corporate law
- Even when not required by federal securities laws
- Involved tender offer by a controlling
stockholder
(Unocal Corp.)
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808 A.2d 421
10.07.02
Levco Alternative Fund v Reader's Digest (Del 2002)
- Directs Chancery Ct. to enjoin corporate recapitalization
- Special committee process found to be
flawed
- Financial advisor failed to separately
address
fairness to non-voting common stock
- Fairness opinion only went to the
"interests of RDA as a corporate entity"
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Precedent Opinions and Disclosures
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To
find precedent examples of fairness opinions
and related proxy statement disclosures,
look under the Fairness opinion or Proxy solicitation
sub-sections
of our collected M&A deals
- Our
collected M&A deals are indexed by:
Also
indexed by financial advisor 
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Related Topics
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