A tale of two fairness opinions; Last year brought us FINRA Rule 2290--a wake-up call for dealmaking directors.

• Author: Kempf, Donald G. Jr.
• Position: MERGERS AND ACQUISITIONS - Financial Industry Regulatory Authority

WHEN IT COMES TO FAIRNESS OPINIONS provided to corporate board members in connection with major corporate transactions, new FINRA Rule 2290 will undoubtedly usher in a new paradigm. The new rule, which went into effect just this past December, mandates that fairness opinions contain substantial new conflict of interest disclosures.

Historically, fairness opinions were provided to directors mainly in transactions where it was anticipated that questions might arise as to the fairness to shareholders of the amount of the consideration involved. As FINRA (formerly the NASD and NYSE regulators) recently stated, fairness opinions "are routinely used by directors ... to satisfy their fiduciary duties to act with due care and in an informed manner."

Regulators, academics, and others have been particularly critical of the practice of directors relying solely on the investment bankers involved in the transaction at issue to provide fairness opinions. The primary reason for this is the potential conflict of interest that arises from having an investment bank whose compensation is contingent on completion of the transaction opining on whether or not the transaction should be completed. Stated differently, the bank will not be paid if it cannot find fairness.

There was heightened focus on the potential conflict of interest issue following a December 2005 opinion by the Delaware Chancery Court. The court commented that hiring the same financial advisors for both deal making and fairness opinions "raises questions regarding the quality and independence of the counsel and advice received."

In the wake of that decision, corporations and directors increasingly have been advised to obtain fairness opinions from independent providers and told that using only the same bankers that are doing the deal to provide a fairness opinion may leave the board members relying on a biased fairness opinion, and thus exposed to lawsuits.

Under new FINRA Rule 2290, fairness opinions must now disclose contingent-fee conflicts and also past and future business relationships that might lead to a potential conflict of interest when providing a fairness opinion. In its release approving (on an expedited basis) the new rule, the SEC said that, with the new rule in place, "shareholders will now be made aware of potential conflicts of interest with regard to the existence of contingent compensation arrangements and other material relationships between the [investment banker] and any...