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The SEC recently approved Rule 2290, requiring specific disclosures in fairness opinions provided by investment banks. Originally proposed in 2005, the Rule attempts to address concerns regarding the conflict of interest that exists when an investment bank provides advisory services on a deal, generally with significant compensation tied to the deal's closing, and also opines that the deal is fair.

The new Rule's requirements include the disclosure by the investment bank of significant compensation that is contingent on successful completion of the transaction. However, unlike the initial proposal, member firms will not have to disclose the actual amount of the contingent payments nor does the Rule specify a threshold amount or percentage that would render a payment significant.

Investor groups lobbying for stricter guidelines including requiring independent fairness opinions from someone other than the investment banker on the deal and/or prohibiting investment banks from receiving success fees for transaction in which they issue a fairness opinion were disappointed.

Will the new rules go far enough in managing the inherent conflict? When looking at the rulings coming out of Delaware's Chancery Court, it's a difficult argument to make. In connection to TCI's 1998 merger with AT&T, Chancellor William Chandler denied the request for a summary judgment citing:

"The effectiveness of a Special Committee often lies in the quality of the advice its members receive from their legal and financial advisors. Rather than retain separate legal and financial advisors, the Special Committee chose to use the legal and financial advisors already advising TCI. This alone raises questions regarding the quality and independence of the counsel and advice received. Furthermore, the contingent compensation of the financial advisor, DLJ, of roughly $40 million creates a serious issue of material fact...A contingently paid and possibly interested financial advisor might be more convenient and cheaper absent a deal, but its potentially misguided recommendations could result in even higher costs..."

In requiring the disclosure of conflict of interests, Rule 2290 is certainly a beneficial move for shareholders. However, Rule 2290 does not require a truly independent opinion, one free of the many conflicts that plague larger investment banks. For that, companies will have to turn to independent firms that do not have a vested interest in the consummation of the transaction.

Category(s): Fairness Opinion Best Practices
Posted by Denise Curd at 07:56 PM | Permalink | Comments (0) | TrackBacks (0)