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September 19, 2006Conflicts of Interest
The conflicts of interest that pervade fairness opinions is one of today's hottest corporate issues. The M&A community is abuzz about the conflicts of interest that exist when an investment bank providing advisory services on a deal, generally with significant compensation tied to the deal's closing, also opines that the deal is "fair." Many view fairness opinion conflicts akin to investment banking conflicts which resulted in separation between equity research and investment banking departments and accounting conflicts which resulted in separation between audit and non-audit functions. Others consider fairness opinions to be under the same microscope as executive compensation. Meanwhile, boards of directors are demanding more fairness opinions than ever before. Simply put, the entire M&A world is bracing for a court ruling that could change the way deals are done. Could investment banks be forced to divest their fairness opinion practices? Might the M&A market be slowed by a change in board liability, state regulation, or anything in between? While no one can predict where the dust will settle, the end result will impact how deals are done and where liability falls.
While the practice of providing advisory services on a transaction and opining to its fairness has long been the industry standard, it has so far evaded strict regulation and has remained a practice allowed with disclosure. Part of the reason for the softer stance on such an apparent conflict, may well be the availability of such obvious targets as the insurance industry, tax shelters and mutual fund scandals, which have held the focus and attention of the New York Attorney General. In addition, the M&A market endured a significant decline in 2002 and 2003, leaving fewer transactions and less shareholder concern. However, the resurgence of the M&A market in the
past two years, the Sarbanes Oxley regulatory climate, and new FASB rules on accounting for transactions have raised the stakes for management, shareholders and board members.
September 18, 2006The Deep Impact of IRC 409A
Many emerging companies rely on equity compensation as a primary component of their incentive pool for key executives and employees. Near the end of 2005, the proposed section 409A was released. Initial reactions
varied widely as to its impact on private companies and the extent of exposure it actually created. However, IRC 409A extends well beyond a tax issue. In fact, tax exposure is quite possibly third or fourth on the enforcement/exposure list. For What its Worth targets this small segment of IRC 409A and explores how it is effecting board members, companies and most importantly the employees who receive them. While the primary focus will be on the valuation issues that arise for companies with complex capital structures we will explore issues such as the cascading effect on financial reporting as private companies begin to expense stock options. We will also examine issues important to board members such as the potential effect on future rounds of funding for companies raising capital and the reporting requirements of limited and general partners.
