March, 2008 | Issue 25
The SEC has approved a new rule addressing conflicts of interest by firms providing fairness opinions in connection with change of control transactions. Rule 2290, originally drafted by the NASD (now FINRA), took effect December 8, 2007. A copy of the rule can be found here.
Fairness opinions are routinely used by directors of companies and other fiduciaries in connection with merger or sale transactions in order to satisfy their duties to act with due care in an informed manner. Fairness opinions have become commonplace in change of control transactions following the 1985 Delaware Supreme Court case of Smith v. Van Gorkom, in which a corporate board was held to have breached its fiduciary duty of care by approving a merger without adequate information on the transaction, including information on the value of the company and the fairness of the offering price.
The new rule grew out of a concern that certain merger advisors who were preparing fairness opinions on a given transaction might also have a contingent fee stake in the successful completion of the transaction that could color their judgment in preparing the fairness opinion.
The new rule requires that members who render fairness opinions inform investors/shareholders about the potential conflicts of interest that may exist between the firm rendering the fairness opinion and the parties to the transaction. Disclosure is required of financial advisory roles or other material relationships with any party to the transaction, as well as of contingent compensation that might be received in connection with the transaction.
Rule Does Not Prohibit Conflicts
Rule 2290 does not prohibit conflicts by firms issuing fairness opinions, but only requires disclosure of such conflicts. There are some who feel that shareholders are better served when directors select financial advisors to provide fairness opinions that do not have a conflict with respect to the transaction.
Hempstead & Co. would welcome your inquiry should you require assistance with a fairness matter. We do not prepare fairness opinions on transactions where we have a contingent fee interest. Our experience as an independent business valuation firm means that a client can have the assurance that our advice will be appropriate and objective.