Fairness opinion
Encyclopedia
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
.
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. 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
(then the National Association of Securities Dealers) issued its Rule 2290 to require disclosure by its members to minimize abuses; this was approved in 2007 by the Securities and Exchange Commission.
The Delaware Court of Chancery
has required sufficient disclosures to “provide a balanced, truthful account of all matters” 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 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.” According to the certification hypothesis fairness opinions may also serve the interest of the shareholders by mitigating informational asymmetries in corporate transactions.
First empirical evidence of fairness opinions in Europe indicates their relevance for shareholders .
Professional
A professional is a person who is paid to undertake a specialised set of tasks and to complete them for a fee. The traditional professions were doctors, lawyers, clergymen, and commissioned military officers. Today, the term is applied to estate agents, surveyors , environmental scientists,...
evaluation
Evaluation
Evaluation is systematic determination of merit, worth, and significance of something or someone using criteria against a set of standards.Evaluation often is used to characterize and appraise subjects of interest in a wide range of human enterprises, including the arts, criminal justice,...
by an investment bank or other third party as to whether the terms of a merger, acquisition
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
, buyback
Buyback
Buyback may refer to:*Buyback, the act of rebuying something that one previously sold, as with a lemon *Share repurchase, also called stock repurchase or share buyback, the repurchase of stock by the company that issued it-See also:...
, spin-off, or going private
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
are fair. It is rendered for a fee
Fee
A fee is the price one pays as remuneration for services. Fees usually allow for overhead, wages, costs, and markup.Traditionally, professionals in Great Britain received a fee in contradistinction to a payment, salary, or wage, and would often use guineas rather than pounds as units of account...
.
Controversy
Controversy in financialFINANCIAL
FINANCIAL is the weekly English-language newspaper with offices in Tbilisi, Georgia and Kiev, Ukraine. Published by Intelligence Group LLC, FINANCIAL is focused on opinion leaders and top business decision-makers; It's about world’s largest companies, investing, careers, and small business. It is...
and management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
circles surrounds the question of the objectivity of fairness opinions, as one aspect of the duty of care in the fairness of a transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
. A potential exists for a conflict of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
when an entity rendering an opinion may benefit from the transaction either directly or indirectly. Directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and officers of the companies also may have an interest in the outcome of the proposed transaction. In response, the Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(then the National Association of Securities Dealers) issued its Rule 2290 to require disclosure by its members to minimize abuses; this was approved in 2007 by the Securities and Exchange Commission.
Equity and fairness
Stockholder lawsuits are in the courts.The Delaware Court of Chancery
Delaware Court of Chancery
The Delaware Court of Chancery is a court of equity in the American state of Delaware. It is one of Delaware's three constitutional courts, along with the Supreme Court and Superior Court.-Jurisdiction:...
has required sufficient disclosures to “provide a balanced, truthful account of all matters” 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 a Memorandum Opinion
Memorandum opinion
A memorandum opinion or memorandum decision is a judicial opinion that does not create precedent, persuasive or mandatory in some jurisdictions. A memorandum is often brief and written only to announce judgment in a particular case...
in the CheckFree/Fiserv
Fiserv
Fiserv, Inc. provides information management systems and services to the financial and insurance industries. Leading services include transaction processing, outsourcing, business process outsourcing , software and systems solutions. The company serves more than 16,000 clients worldwide...
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.” According to the certification hypothesis fairness opinions may also serve the interest of the shareholders by mitigating informational asymmetries in corporate transactions.
First empirical evidence of fairness opinions in Europe indicates their relevance for shareholders .
External links
- Sample Fairness Opinion from VC Experts.com