71 Pages Posted: 7 Feb 2006 Last revised: 29 Nov 2007
This Article re-examines the fairness opinion, as well as its role and necessity in corporate control transactions. This Article argues that today's fairness opinion regime is deeply flawed and, as a consequence, a fairness opinion has little meaning. The reasons are primarily this: the financial analyses underlying fairness opinions, as currently prepared by investment banks, are prone to excessive subjectivity and are frequently the product of valuation techniques that are not in accord with best practices. These defects are exacerbated by the recurring problem of these same investment banks who are conflicted in their provision of these opinions. Meanwhile, SEC and FINRA regulation of fairness opinions does not adequately address these fundamental issues while the Delaware courts continue to periodically reassert, without question, Smith v. Van Gorkom's implicit fairness opinion requirement, thereby bestowing excessive significance to the fairness opinion.
This Article, though, does not call for the fairness opinion's death. Rather, I argue that the fairness opinion regime should be reformed through a quasi-public, standard-setting body. Creation of this body and its adoption of standards and guidelines for preparation of a fairness opinion and its undergirding financial analyses, as well as heightened disclosure requirements, should enhance the economics and usefulness of the fairness opinion by reducing subjectivity in valuation, ensuring proper grounding and permitting increased market scrutiny. Implementation of these reforms would also do more to alleviate the related and repeatedly cited problem of investment bank conflicts of interest than prior disclosure-based and other proposals.
If these reforms are adopted, the fairness opinion, in and of itself, is still not a panacea. It will always be an inferior substitute for a market-based approach to determine the fairness of the consideration in a corporate control transaction. However, a valuation conducted with rigor and in accordance with disclosed standards and guidelines can inform materially as to value when a market-based price is unavailable or unobtainable. In such a context, a fairness opinion can have meaning. Even in such situations, though, the inherent limitations of state-of-the-art valuation should be recognized; a fairness opinion should only be one of many tools to assist a board in gauging what is a fair price. The Delaware courts should recognize this, repudiating Van Gorkom's wholesale, implicit fairness opinion requirement when the agreed price is a market-based one. In other circumstances, a fairness opinion should not be required, but if received, should be considered by the Delaware courts as only one indicative factor to be utilized in assessing a board's satisfaction of its duty of care.
Keywords: fairness opinion, Van Gorkom, corporate control transaction, takeovers
JEL Classification: G34, G38, K22
Suggested Citation: Suggested Citation