Fairness opinion

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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 privatization are fair. [1] It is rendered for a fee. [2] [3] They are typically issued when a public company is being sold, merged or divested of all or a substantial division of their business. They can also be required in private transactions not involving a company that is traded on a public exchange, [4] as well as in circumstances other than mergers, such as a corporation exchanging debt for equity. [5] Some of the specific functions of a fairness opinion are to aid in decision-making, mitigate risk, and enhance communication. [6]

Professional person who is paid to undertake a specialized set of tasks and to complete them for a fee

A professional is a member of a profession or any person who earns their living from a specified professional activity. The term also describes the standards of education and training that prepare members of the profession with the particular knowledge and skills necessary to perform their specific role within that profession. In addition, most professionals are subject to strict codes of conduct, enshrining rigorous ethical and moral obligations. Professional standards of practice and ethics for a particular field are typically agreed upon and maintained through widely recognized professional associations, such as the IEEE. Some definitions of "professional" limit this term to those professions that serve some important aspect of public interest and the general good of society.

Evaluation is a systematic determination of a subject's merit, worth and significance, using criteria governed by a set of standards. It can assist an organization, program, design, project or any other intervention or initiative to assess any aim, realisable concept/proposal, or any alternative, to help in decision-making; or to ascertain the degree of achievement or value in regard to the aim and objectives and results of any such action that has been completed. The primary purpose of evaluation, in addition to gaining insight into prior or existing initiatives, is to enable reflection and assist in the identification of future change.

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.

Contents

Controversy

Controversy in financial 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. [7] Directors and officers of the companies also may have an interest in the outcome of the proposed transaction. [8] In response, in the United States, 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; [9] this was approved in 2007 by the Securities and Exchange Commission. [10]

Management Coordinating the efforts of people

Management is the administration of an organization, whether it is a business, a not-for-profit organization, or government body. Management includes the activities of setting the strategy of an organization and coordinating the efforts of its employees to accomplish its objectives through the application of available resources, such as financial, natural, technological, and human resources. The term "management" may also refer to those people who manage an organization.

Equity (law) Set of legal principles supplementing but distinct from the Common Law

In jurisdictions following the English common law system, equity is the body of law which was developed in the English Court of Chancery and which is now administered concurrently with the common law.

Financial transaction agreement, or communication, carried out between a buyer and a seller to exchange an asset for payment

A financial transaction is an agreement, or communication, carried out between a buyer and a seller to exchange an asset for payment.

Equity and fairness

In the United States, in the context of stockholder lawsuits, [11] typically relating to the sale or merger of a public company, the Delaware Court of Chancery has required sufficient disclosures be made to a board of directors and shareholders to “provide a balanced, truthful account of all matters” [12] 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.” [13] 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.” [14] According to the certification hypothesis fairness opinions may also serve the interest of the shareholders by mitigating informational asymmetries in corporate transactions. [15]

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.

Fiserv company

Fiserv, Inc. is a global provider of financial services technology. The company's clients include banks, thrifts, credit unions, securities broker dealers, leasing and finance companies, and retailers. In October 2015, American Banker and BAI ranked the company third by revenue among technology providers to U.S. banks. Fiserv reported total revenue of $5.51 billion in 2016. In summer of 2018, Fiserv obtained the naming rights to the Fiserv Forum, home to the Milwaukee Bucks, for 25 years. Fiserv has been named as 2019 Fortune World's Most Admired Companies, sixth consecutive year it has earned this recognition and 9 times in the last 11 years.

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U.S. Securities and Exchange Commission Government agency

The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government. The SEC holds primary responsibility for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry, the nation's stock and options exchanges, and other activities and organizations, including the electronic securities markets in the United States.

Securities Act of 1933

The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression, after the stock market crash of 1929. Legislated pursuant to the Interstate Commerce Clause of the Constitution, it requires every offer or sale of securities that uses the means and instrumentalities of interstate commerce to be registered with the SEC pursuant to the 1933 Act, unless an exemption from registration exists under the law. The term "means and instrumentalities of interstate commerce" is extremely broad and it is virtually impossible to avoid the operation of the statute by attempting to offer or sell a security without using an "instrumentality" of interstate commerce. Any use of a telephone, for example, or the mails would probably be enough to subject the transaction to the statute.

Financial audit

A financial audit is conducted to provide an opinion whether "financial statements" are stated in accordance with specified criteria. Normally, the criteria are international accounting standards, although auditors may conduct audits of financial statements prepared using the cash basis or some other basis of accounting appropriate for the organisation. In providing an opinion whether financial statements are fairly stated in accordance with accounting standards, the auditor gathers evidence to determine whether the statements contain material errors or other misstatements.

Due diligence legal term

Due diligence is the investigation or exercise of care that a reasonable business or person is expected to take before entering into an agreement or contract with another party, or an act with a certain standard of care.

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 is a law governing the secondary trading of securities in the United States of America. A landmark of wide-ranging legislation, the Act of '34 and related statutes form the basis of regulation of the financial markets and their participants in the United States. The 1934 Act also established the Securities and Exchange Commission (SEC), the agency primarily responsible for enforcement of United States federal securities law.

A reverse takeover or reverse merger takeover is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company. Sometimes, conversely, the private company is bought by the public listed company through an asset swap and share issue.

OTC Markets Group Company operating an electronic inter-dealer securities quotation system

OTC Markets Group is an American financial market providing price and liquidity information for almost 10,000 over-the-counter (OTC) securities. The group has its headquarters in New York City. OTC-traded securities are organized into three markets to inform investors of opportunities and risks: OTCQX, OTCQB and Pink.

Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal- and state-level regulation by purely governmental regulatory agencies, but sometimes may also encompass listing requirements of exchanges like the New York Stock Exchange and rules of self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA).

NYSE Euronext, Inc. was a Euro-American multinational financial services corporation that operated multiple securities exchanges, including the New York Stock Exchange, Euronext and NYSE Arca. NYSE merged with Archipelago Holdings on March 7, 2006, forming NYSE Group, Inc. On April 4, 2007, NYSE Group, Inc. merged with Euronext N.V. to form the first global equities exchange, with its headquarters in Lower Manhattan. The corporation was then acquired by IntercontinentalExchange, which subsequently spun off Euronext.

A special purpose acquisition company (SPAC) is a type of investment fund that allows public stock market investors to invest in private equity type transactions, particularly leveraged buyouts. SPACs are shell or blank-check companies that have no operations but go public with the intention of merging with or acquiring a company with the proceeds of the SPAC's initial public offering (IPO).

International Organization of Securities Commissions organization

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In the United States, the Financial Industry Regulatory Authority, Inc. (FINRA) is a private corporation that acts as a self-regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD) and the member regulation, enforcement, and arbitration operations of the New York Stock Exchange. It is a non-governmental organization that regulates member brokerage firms and exchange markets. The government agency which acts as the ultimate regulator of the securities industry, including FINRA, is the Securities and Exchange Commission.

An alternative public offering (APO) is the combination of a reverse merger with a simultaneous private investment of public equity (PIPE). It allows companies an alternative to an initial public offering (IPO) as a means of going public while raising capital.

Houlihan Smith & Company was an investment banking firm that provided financial advisory and financing services to public and private businesses. Houlihan was founded in 1996 but closed in 2011.

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Duff & Phelps is a consultancy firm based in the United States.

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The Dodd–Frank Wall Street Reform and Consumer Protection Act is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the financial crisis of 2007–2008, and it made changes affecting all federal financial regulatory agencies and almost every part of the nation's financial services industry.

Regulation S-K is a prescribed regulation under the US Securities Act of 1933 that lays out reporting requirements for various SEC filings used by public companies. Companies are also often called issuers, filers or registrants.

Unlike stocks, which generally trade transparently on public exchanges, corporate bonds and structured products trade "over-the-counter", meaning they are private transactions between individual counterparties, and so the transactions were generally not publicly reported. To create better transparency into the bond market, the Securities and Exchange Commission under the Rule 6200 Series instituted the trade reporting and compliance engine (TRACE). TRACE has two major aspects:

References

  1. "About Fairness Opinions | JPKatz", JPKatz.com.
  2. "Definition, Fairness Opinion", Investorwords.com.
  3. Ralph Ward, "A Briefing On Fairness Opinions", Inc.com (February 2001).
  4. ""Fairness Opinion in private transactions", Blackpartners.pl". Archived from the original on 2013-12-03. Retrieved 2013-12-02.
  5. Jill R. GoodmanNew York Times Dealbook
  6. Ferro, John; Benoit, Bryan. "Raising the Bar for Fairness Opinions". Transaction Advisors. ISSN   2329-9134.
  7. Marie Leone, "Fairness Opinion Neutrality Questioned", CFO.com (February 2, 2006).
  8. Yasuhiro Ohta and Kenton K. Yee, "The Fairness Opinion Puzzle: Board Incentives, Information Asymmetry, and Bidding Strategy," Journal Of Legal Studies 37.1, pp. 229-272 (January 2008)
  9. Cahill Gordon & Reindel , "FINRA Rule 2290: Required Disclosures in Fairness Opinions" (November 6, 2007)
  10. "Fairness Opinions: SEC Approves New NASD Rule 2290 Regarding Fairness Opinions", FINRA Regulatory Notice 07-54. Effective Date: December 8, 2007. [ permanent dead link ]
  11. Steven M. Davidoff, "Fairness Opinions", American University Law Review, v. 55, p. 1557.
  12. Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998)
  13. In re Pure Resources, Inc. S’holders Litig., 808 A.2d 421 (Del. Ch. 2002), pp. 447-8.
  14. In re CheckFree Corp. S’holders Litig., C.A. No. 3193-CC (Del. Ch. Oct. 18, 2007), Memorandum Opinion, Consolidated Civil Action No. 3193-CC (November 1, 2007).
  15. Pierfrancesco LaMura, Marc Steffen Rapp, Bernhard Schwetzler, Andreas Wilms, “The Certification Hypothesis of Fairness Opinions”, 2009)

Example Fairness Opinions (SEC filings) relating to the merger of Merck & Co., Inc. and Schering-Plough Corporation:

Merck & Co., Inc., d.b.a. Merck Sharp & Dohme (MSD) outside the United States and Canada, is an American multinational pharmaceutical company and one of the largest pharmaceutical companies in the world.