Conflict in Fairness Opinions – Not Just a Public Company Concern

“I have views on most matters, and I am as willing as a politician to change most of them.” -James Agate

As the board of directors meeting ends, and you, the company’s Chairman, stand to leave, you wonder about the transaction you have just voted to approve. You believe the transaction is fair. You helped to negotiate the price and terms yourself. You hold in your hands the Fairness Opinion issued by your investment banking firm – the same firm that will collect a multi-million dollar fee on the day of the closing of the merger. All of the bases are covered. You’ll sleep soundly tonight knowing that you have done all you can do and that this merger is right for your company and its shareholders. Full steam ahead? Or maybe it should be ‘CAUTION AHEAD’.

Private Companies Becoming Scrutinized

In today’s environment, chairman of the board for the above company would probably not be sleeping too well tonight. With the intense scrutiny brought about by numerous large company failures and the illumination of how conflicts of interests played into those failures, Congress, regulators and shareholders are all more conscious of independence. The question of fairness and conflict of interest is beginning to be raised in private companies with multiple shareholders.

The Wall Street Journal recently reported that the NASD has begun inquiring into conflicts of interest by firms routinely issuing Fairness Opinions on the value of mergers and acquisitions. Like the situation described above, many of the fairness opinions under scrutiny were issued by investment banking firms that stand to collect significant success fees upon completion of the very deal for which the opinion of fairness is being offered. Not surprisingly, very few instances arise in which a deal is not certified as fair. In these cases, the conflict of interest is obvious and the question arises as to whether the board of directors has met its fiduciary responsibilities to the shareholders.

Protection in the event of a challenge

While even completely independent firms may feel pressure to issue an affirmative opinion, firms with “skin-in-the-game” will naturally appear to be under a heavier burden to bless the deal, whatever the deal may be. As the ‘regulatory light’ shines more intensely upon these transactions, companies and their advisors should carefully consider whether they are receiving a truly independent fairness opinion, that will protect them in the event of a challenge.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Tracy Lamb

Valuation
tlamb@pcecompanies.com
Orlando Office

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