Fairness opinions and the business judgment rule: An empirical investigation of target firms' use of fairness opinions

Northwestern University Law Review

Volumn 96, Issue 2, 2002, Pages 567-577

  Bowers, Helen M ^a  

^a NONE

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EID: 0038891894     PISSN: 00293571     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (39)

1. Arthur Hays Sulzberger, former publisher, New York Times, Address to the New York State Publishers Association (Aug. 30, 1948).
2. The term "financial advisor" is defined here to include investment bankers and all other providers of fairness opinions in change-of-control transactions.
3. 488 A.2d 858 (Del. 1985).
4. See infra Part III.
5. See infra Part III.
6. See infra Part III.E.
7. Andrei Shleifer & Robert W. Vishny, The Takeover Wave of the 1980s, 4 J. APPLIED CORP. FIN. 49, 50 (1991). The first merger wave occurred between the enactments of the Sherman Antitrust Act in 1890 and the Clayton Act of 1914. The stock market's receptiveness to new security issues in the late 1920s bolstered the second wave.
8. See, e.g., Michael C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance, and Take-overs, 76 AM. ECON. REV. 323 (1986).
9. See M. Mark Walker, Corporate Takeovers, Strategic Objectives, and Acquiring-Firm Shareholder Wealth, 29 FIN. MGMT. 53 (2000).
10. See Larry H.P. Lang & René M. Stulz, Tobin's q, Corporate Diversification, and Firm Performance, 102 J. POL. ECON. 1248 (1994).
11. See Philip G. Berger & Eli Ofek, Diversification's Effect on Firm Value, 37 J. FIN. ECON. 39 (1995).
12. See Helen M. Bowers & Norman H. Moore, Market Valuation of Excess Pension Assets: Evidence from the Market for Corporate Control, 62 J. RISK & INS. 214, 216 (1995).
13. See, e.g., John Pound, Raiders, Targets, and Politics: The History and Future of American Corporate Control, 5 J. APPLIED CORP. FIN. 6 (1992).
14. See ALEXANDRA REED LAJOUX & CHARLES M. ELSON, THE ART OF M&A DUE DILIGENCE 22 (2000) (recommending that the provider of a fairness opinion be qualified and independent, such as an investment banking firm, a commercial bank, an appraiser, or a consultant specializing in valuation); Paul Sweeney, Who Says It's a Fair Deal?, 188 J. Acer. 44, 45 (Aug. 1999) (noting that there are no legally specified credentials qualifying issuers of fairness opinions, and that most often opinions are written by investment banks but can also be provided by consulting firms and CPA firms).
15. See ALEXANDRA REED LAJOUX & CHARLES M. ELSON, THE ART OF M&A DUE DILIGENCE 22 (2000) (recommending that the provider of a fairness opinion be qualified and independent, such as an investment banking firm, a commercial bank, an appraiser, or a consultant specializing in valuation); Paul Sweeney, Who Says It's a Fair Deal?, 188 J. Acer. 44, 45 (Aug. 1999) (noting that there are no legally specified credentials qualifying issuers of fairness opinions, and that most often opinions are written by investment banks but can also be provided by consulting firms and CPA firms).
16. There is no discussion in Van Gorkom concerning how an "independent" valuation should be reached or what determines if it is, in fact, independent. Compare Dennis J. Block & Jonathon M. Hoff, Reliance on Fairness Opinions, N.Y. L.J., June 16, 1994, at 5 (defining fairness opinion as an independent analysis and advising boards to make every effort to insure the independence of the issuer of the fairness opinion especially when management is an interested party to the transaction), with Lucian Arye Bebchuk & Marcel Kahan, Fairness Opinions: How Fair Are They and What Can Be Done About It?, 27 DUKE L.J. 27, 29-45 (1989) (positing that it is virtually impossible to obtain an unbiased fairness opinion because the issuer faces an inherent conflict of interest arising from prior, existing, and potential business relationships with management, and because the issuer is allowed substantial discretion in how to arrive at their valuation).
17. There is no discussion in Van Gorkom concerning how an "independent" valuation should be reached or what determines if it is, in fact, independent. Compare Dennis J. Block & Jonathon M. Hoff, Reliance on Fairness Opinions, N.Y. L.J., June 16, 1994, at 5 (defining fairness opinion as an independent analysis and advising boards to make every effort to insure the independence of the issuer of the fairness opinion especially when management is an interested party to the transaction), with Lucian Arye Bebchuk & Marcel Kahan, Fairness Opinions: How Fair Are They and What Can Be Done About It?, 27 DUKE L.J. 27, 29-45 (1989) (positing that it is virtually impossible to obtain an unbiased fairness opinion because the issuer faces an inherent conflict of interest arising from prior, existing, and potential business relationships with management, and because the issuer is allowed substantial discretion in how to arrive at their valuation).
18. The Delaware Supreme Court has repeatedly held that corporate boards are protected from shareholders liability from the consequences of adverse business decisions if the decision was arrived at in an informed manner, rationally based, and made in good faith that the action was in the best interest of the company. See. e.g., Aronson v. Lewis, 473 A.2d 805 (Del. 1984).
19. See Smith v. Van Gorkom, 488 A.2d 858, 867 (Del. 1985) (noting that Brennan was not Trans Union's regular counsel and was retained on the day before the meeting by Jerome Van Gorkom to advise Trans Union on the legal aspects of the merger).
20. Id. at 868.
21. Id. at 881.
22. Id. at 876.
23. Id. at 877-78.
24. Id. at 880.
25. Charles M. Elson, The Duty of Care, Compensation, and Stock Ownership, 63 U. CIN. L. REV. 649, 677 (1995) (footnotes omitted).
26. Bill Shaw & Edward J. Gac, Fairness Opinions in Leveraged Buy Outs: Should Investment Bankers Be Directly Liable to Shareholders?, 23 SEC. REG. L.J. 293, 293 (1995).
27. Sweeney, supra note 14, at 44.
28. Stephen I. Glover & Doketra M. Vansimme, Fairness Opinion Issues: Anything but Routine, NAT'L L.J., Apr. 15, 1996, at C13.
29. The sample of acquiring and target firms and the target financial advisor assignment is obtained from Thompson's Security Data Corporations' (SDC) Worldwide Mergers and Acquisitions database. In addition to the conditions specified above, to be included in the sample the acquisition must be completed, neither the acquiring or target firm can be in the financial services industry, and the transaction must be a merger, tender offer, exchange offer, or leveraged buyout.
30. See Shaw & Gac, supra note 24; Robert J. Giuffra, Jr., Note, Investment Bankers' Fairness Opinions in Corporate Control Transactions, 96 YALE L.J. 119 (1986); M. Breen Haire, Comment, The Fiduciary Responsibilities of Investment Bankers in Change-of-Control Transactions: In Re Daisy Systems Corp., 74 N.Y.U. L. REV. 277 (1999).
31. See Shaw & Gac, supra note 24; Robert J. Giuffra, Jr., Note, Investment Bankers' Fairness Opinions in Corporate Control Transactions, 96 YALE L.J. 119 (1986); M. Breen Haire, Comment, The Fiduciary Responsibilities of Investment Bankers in Change-of-Control Transactions: In Re Daisy Systems Corp., 74 N.Y.U. L. REV. 277 (1999).
32. See Shaw & Gac, supra note 24; Robert J. Giuffra, Jr., Note, Investment Bankers' Fairness Opinions in Corporate Control Transactions, 96 YALE L.J. 119 (1986); M. Breen Haire, Comment, The Fiduciary Responsibilities of Investment Bankers in Change-of-Control Transactions: In Re Daisy Systems Corp., 74 N.Y.U. L. REV. 277 (1999).
33. See, e.g., Herskowitz v. Nutri/System, Inc., 857 F.2d 179 (3d Cir. 1988).
34. See. e.g., Adams v. Standard Knitting Mills, Inc., 623 F.2d 422 (6th Cir. 1980).
35. See, e.g., Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (Del. 1989).
36. See, e.g., In re Daisy Sys. Corp., 97 F.3d 1171 (9th Cir. 1996); Schneider v. Lazard Freres & Co., 552 N.Y.S.2d 571 (N.Y. App. Div. 1990).
37. Haire, supra note 28, at 279.
38. See Stephen Choi, Market Lessons for Gatekeepers, 92 NW. U. L. REV. 916 (1998).
39. All other acquisition services include initiating the deal, arranging financing, and representing various claimants.