Second Fairness Opinions
Recent headline grabbing corporate scandals have focused attention on the importance of independence for public accountants. In a transaction environment, corporate governance best practices emphasize not only the independence of auditors but also the financial advisor issuing a fairness opinion. Since the landmark court case, Smith v. Van Gorkom (Delaware, 1985), fairness opinions have become quite commonplace in corporate control transactions. The purpose of the fairness opinion is to determine if the price being offered to shareholders is within a range of values that would be considered "fair" from a financial point of view.
Many investment banking firms that are hired to complete a transaction are frequently retained to provide a fairness opinion on the same transaction. This creates obvious conflicts of interest if any of the following conditions are met:
- The investment banking firm has a financial interest in the company being transacted;
- The investment banking firm has an existing relationship with the company or other parties involved in the transaction; or,
- The fee to be paid the investment banking firm is in any way contingent upon the successful completion of the transaction.
Although the third item generally receives the most attention, the National Association of Securities Dealers (NASD), in November 2004, proposed regulations that would serve to address all three items. Among other things, the new rule would require members (firms issuing fairness opinions) to:
- disclose in any fairness opinion appearing in any proxy statement any significant conflicts of interest, including, if applicable, that the member has served as an advisor on