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TIMELY NEWS, ANALYSIS, AND RESOURCES FOR DEFENSIBLE VALUATIONS
Vol. 24, No. 9, September 2018
BUSINESS VALUATION UPDATE
bvresources.com
Reprinted with permissions from Business Valuation Resources, LLC
By Gilbert E. Matthews, CFA
It is common practice for proxy statements to
contain fairness opinions that are dated weeks (or
months) prior to the mailing date. Typically, they
are not reviewed in the interim. This is the case
even though the Delaware Court of Chancery
has stated:
The nancial advisor’s opinion of nancial
fairness for a proposed transaction is one
of the most important process-based un-
derpinnings of a board’s recommendation
of a transaction to its stockholders and, in
turn, for the stockholders’ decisions on the
appropriateness of the transaction.1
A fairness opinion is customarily dated on the
day it is rendered to a board of directors or to a
special committee, usually immediately prior to
the board’s vote to approve a transaction. The
mailing date of a proxy statement or similar docu-
ment sent to shareholders is often two months or
more after the opinion was originally given.
Adverse changes in a company’s recent opera-
tions or prospects, in market conditions, in in-
dustry conditions, and in other factors could
cause a transaction that had been fair when an
opinion is initially rendered to become unfair by
the mailing date. However, the inclusion of a fair-
ness opinion in a mailing to shareholders implies
that the opinion is still valid at that later date.
1 David P. Simonetti Rollover IRA v. Margolis, 2008 Del.
Ch. LEXIS 78 (June 27, 2008) at *25.
If a fairness opinion is no longer valid when a
proxy statement is sent to shareholders, the
proxy statement becomes misleading. If a ma-
terial change in market conditions or in factors
intrinsic to the target company (or to the acquiror
in a stock-for-stock merger) occurs after a fair-
ness opinion has been rendered, the issuer of
the opinion should consider whether or not its
opinion is still valid and, if appropriate, it should
withdraw its opinion.
The withdrawal of a fairness opinion is uncom-
mon but not unprecedented. In rare cases, opin-
ions have been withdrawn subsequent to mailing
of a proxy statement. For example, Bear Stearns
withdrew a fairness opinion in 1984 that it had
rendered to Far West Financial Corp. in a going-
private transaction because a takeover battle for
Gulf Oil, in which Far West had a major invest-
ment, resulted in a material increase in Far West’s
value shortly before the shareholder vote. The
shareholders meeting was cancelled, and the
proposed transaction aborted.
In the past, a small number of rms had a policy
of requiring that fairness opinions be updated
before their inclusion in proxy statements. A 1993
Delaware decision noted that Goldman Sachs
then had this policy,2 and it was Bear Stearns’
policy for more than two decades.3
2 “Goldman Sachs’s policy is to update its analyses at
the time of mailing of proxy materials and to permit
the distribution of its [fairness] opinion only if it con-
tinues to be valid.” Behrens v. Utd. Investors Mgt. Co.,
1993 Del. Ch. LEXIS 217 (Del. Ch. Oct. 1, 1993) at *28.
3 The author was chairman of Bear Stearns’ Valuation
Committee from 1970 through 1995.
Stale Fairness Opinions in Related Party
Transactions Should Be Updated
2 Business Valuation Update September 2018 Business Valuation Resources
STALE FAIRNESS OPINIONS IN RELATED PARTY TRANSACTIONS SHOULD BE UPDATED
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R. JAMES ALERDING, CPA/ABV, ASA
ALERDING CONSULTING LLC
INDIANAPOLIS, IN
CHRISTINE BAKER, CPA/ABV/CFF
CHARTER CAPITAL PARTNERS
GRAND RAPIDS, MI
NEIL J. BEATON, CPA/ABV, CFA, ASA
ALVAREZ & MARSAL VALUATION SERVICES
SEATTLE, WA
JOHN A. BOGDANSKI, ESQ.
LEWIS & CLARK LAW SCHOOL
PORTLAND, OR
ROD BURKERT, CPA/ABV, CVA
BURKERT VALUATION ADVISORS LLC
MADISON, SD
DR. MICHAEL A. CRAIN, CPA/ABV, CFA, CFE
FLORIDA ATLANTIC UNIVERSITY
BOCA RATON, FL
MARK O. DIETRICH, CPA/ABV
FRAMINGHAM, MA
JOHN-HENRY EVERSGERD, ASA, CFA, MBA
PPB ADVISORY
SYDNEY, AUSTRALIA
NANCY J. FANNON, ASA, CPA/ABV, MCBA
MARCUM LLP
PORTLAND, ME
JAY E. FISHMAN, FASA, FRICS
FINANCIAL RESEARCH ASSOCIATES
BALA CYNWYD, PA
LYNNE Z. GOLD-BIKIN, ESQ.
WEBER GALLAGHER
NORRISTOWN, PA
LANCE S. HALL, ASA
STOUT RISIUS ROSS
IRVINE, CA
THEODORE D. ISRAEL, CPA/ABV/CFF, CVA
ISRAEL FREY GROUP LLP
SAN RAFAEL, CA
JARED KAPLAN, ESQ.
MCDERMOTT, WILL & EMERY
CHICAGO, IL
HAROLD G. MARTIN JR.
CPA/ABV/CFF, ASA, CFE
KEITER
GLEN ALLEN, VA
GILBERT E. MATTHEWS, CFA
SUTTER SECURITIES INC.
SAN FRANCISCO, CA
Z. CHRISTOPHER MERCER, ASA, CFA
MERCER CAPITAL
MEMPHIS, TN
JOHN W. PORTER, ESQ.
BAKER & BOTTS
HOUSTON, TX
RONALD L. SEIGNEUR,
MBA, ASA, CPA/ABV, CVA, CFF
SEIGNEUR GUSTAFSON
LAKEWOOD, CO
ANDREW STRICKLAND, FCA
SCRUTTON BLAND
UNITED KINGDOM
EDWINA TAM, ASA, CBV
DELOITTE
HONG KONG
JEFFREY S. TARBELL, ASA, CFA
HOULIHAN LOKEY
SAN FRANCISCO, CA
GARY R. TRUGMAN,
ASA, CPA/ABV, MCBA, MVS
TRUGMAN VALUATION ASSOCIATES
PLANTATION, FL
KEVIN R. YEANOPLOS,
CPA/ABV/CFF, ASA
BRUEGGEMAN & JOHNSON
YEANOPLOS PC
TUCSON, AZ
EDITORIAL ADVISORY BOARD
BUSINESS VALUATION UPDATE
Publisher: Sarah Andersen
Managing Editor: Monique Nijhout- Rowe
Senior Cop y Editor: David Solomon
Desktop Editor: Warren Simon s
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The author searched the SEC’s EDGAR database
for proxy statements from 1998 through mid-
2018 in which fairness opinions were updated to
a date proximate to the mailing date (other than
transactions where the terms of the deal were
changed subsequent to the initial opinion).4 The
results are summarized in the exhibit. It shows
that a substantial majority of the opinions that
were updated were for bank acquisitions. (Nine-
ty-seven percent of the bank fairness opinions
and 59% of the others were in arm’s-length
transactions.) It also shows that the practice of
updating fairness opinions declined after 2000
and that it has become much rarer in recent
years.
In 2007, the NASD (now FINRA) requested com-
ments on its pending Rule 2290 (now FINRA Rule
5150) regarding disclosures and procedures for
fairness opinions broker-dealers issue. It rejected
a proposal establishing procedures with respect
to updating fairness opinions:
One commenter suggested that NASD
should require members to establish pro-
cedures to determine under what circum-
stances their fairness opinions should be
updated, and to address, prior to public
distribution of an opinion, whether that
opinion should be reafrmed or withdrawn.
The commenter further suggested that in
the event a non-updated fairness opinion
is included in materials sent to sharehold-
ers, the member should be required to
disclose the basis on which it determined
not to update the opinion. The need to
update fairness opinions is not germane to
the primary purpose of the proposed rule,
which is to address potential conflicts of
interest.5
4 The search used numerous keywords to identify
updated fairness opinions. It is likely that the search
found most, but not all, of the relevant opinions.
5 NASD response to comments on proposed NASD
Rule 2290 [now FINRA Rule 5250], June 7, 2007, p. 19.
bvresources.com September 2018 Business Valuation Update 3
STALE FAIRNESS OPINIONS IN RELATED PARTY TRANSACTIONS SHOULD BE UPDATED
Reprinted with permissions from Business Valuation Resources, LLC
Federal courts have ruled that a fairness opinion
is false only if the party rendering the opinion
does not sincerely believe it to be correct:
A fairness opinion is “objectively false” if the
subject matter of the opinion is not, in fact,
fair, and is “subjectively false” if the speaker
does not, in fact, believe the subject matter
of the opinion to be fair.6
While material statements of fact are false
if they are contradicted by true facts, mate-
rial statements of opinion are false only if
the opinion was not sincerely held…. In the
6 Shurkin v. Golden State Vintners, Inc., 471 F. Supp.
2d 998, 1013 (N.D. Cal. 2006), citing In Re McKesson
HBOC, Inc. Securities Litig., 126 F. Supp. 2d 1248,
1265 (N.D. Cal. 2000).
case of a fairness opinion, then, the plain-
tiff must plead with particularity why the
statement of opinion was objectively and
subjectively false.7
More recently, a federal court found that the
investment banker had been retained only to
provide a fairness opinion and that its opinion
was not false or intentionally misleading.8 It com-
mented:
Under New York and Texas law, the ele-
ments of a fraud cause of action are: (1) a
material representation was made; (2) it
7 McKesson HBOC at 1265.
8 Seven Seas Petroleum, Inc. v. CIBC World Markets,
2010 U.S. Dist. LEXIS 54946 (S.D. Tex. June 4, 2010) at
*76.
Fairness Opinions Updated in Proxy Statement
4 Business Valuation Update September 2018 Business Valuation Resources
STALE FAIRNESS OPINIONS IN RELATED PARTY TRANSACTIONS SHOULD BE UPDATED
Reprinted with permissions from Business Valuation Resources, LLC
was false when made; (3) the speaker either
knew it was false, or made it without knowl-
edge of its truth; (4) the speaker made it
with the intent that it should be acted upon;
(5) the party acted in reliance; and (6) the
party was injured as a result.9
In that case, the investment banker’s opinion sur-
vived the court’s scrutiny. In a situation where
material developments subsequent to the
initial rendering of the fairness opinion make
the opinion clearly incorrect, might a court rule
differently? Would the standard disclaimers10
protect an investment banker who knew, or
should have known, that the transaction was no
longer fair? Even if the investment banker was
protected, would the directors have liability? An
updated fairness opinion would protect the pro-
spective defendants.
Investment banks often include in their engage-
ment letters a specic provision that their fairness
opinion will not be updated, and these provisions
have been upheld in court. There is no legal re-
quirement that fairness opinions be updated.
The U.S. Court of Appeals rejected a claim that a
fairness opinion by Credit Suisse First Boston had
been grossly negligent when it did not update a
fairness opinion when its engagement letter ad-
dressed this point:
The engagement contract says that CSFB
has … no duty to update its opinion. CSFB
did what it was hired to do. The Trust’s
belief that CSFB should have been hired
9 Ibid. at *25-26.
10 E.g., “This opinion addresses only the fairness from
a nancial point of view as of the date hereof,” “Our
opinion is based on economic, monetary and market
conditions as they exist and can be evaluated as of
the date hereof and we assume no responsibility to
update or revise our opinion based upon circum-
stances and events occurring after the date hereof,”
and “Our opinion does not constitute a recommenda-
tion to any stockholder as to how such stockholder
should vote with respect to the Merger.”
to do something different is not a basis of
liability.11
Similarly, the Delaware Court of Chancery has
ruled that when “the opinion clearly states when
the opinion was rendered and that [the invest-
ment banker] was not asked to and was not under
an obligation to update its fairness opinion,
… one cannot say that the opinion is mislead-
ing even though one might consider it of little
value.”12
However, directors have a responsibility to ask
whether market changes have caused a transac-
tion to become unfair:
Perhaps some set of intervening changes in
public markets would be such as to require
diligent directors to, in effect, say, “How
could it be that the deal we earlier nego-
tiated is still fair to the minority?” In that
event, the directors’ duty of care would
require them to inquire into the grounds of
the advisor’s view, and in such circumstanc-
es, then make appropriate disclosure with
respect to any material facts they learn. In
such a case if the board failed to make that
inquiry, its members may have failed in the
execution of their duty to make an informed
judgment.13
By extension, material changes to the target
company or, in stock deals, to the acquiror should
be similarly addressed.
A plaintiffs’ counsel could cite this decision in a
situation where an outdated fairness opinion has
become inappropriate because of subsequent
events. If directors have ignored the changed
circumstances (or are blissfully unaware of them),
11 HA2003 Liquidating Trust v. Credit Suisse Secs. (USA)
LLC, 517 F.3d 454, 458-9 (7th Cir. 2008).
12 Ince & Co. v. Silgan Corp., 1991 Del. Ch. LEXIS 20 (Del.
Ch. Feb. 7, 1991) at *16.
13 Behrens v. Utd. Investors Mgt. Co., 1993 Del. Ch. LEXIS
217 (Del. Ch. Oct. 1, 1993) at *43-*44.
bvresources.com September 2018 Business Valuation Update 5
STALE FAIRNESS OPINIONS IN RELATED PARTY TRANSACTIONS SHOULD BE UPDATED
Reprinted with permissions from Business Valuation Resources, LLC
plaintiffs could argue that they have breached
their fiduciary duties by failing to make an in-
formed judgment as to the fairness of the trans-
action at the time the shareholders’ votes are
being solicited.
Courts have considered whether fairness opin-
ions may have become outdated due to subse-
quent events. In a Delaware case where plaintiffs
alleged that a material change in the price of
natural gas made a squeeze-out of shareholders
of a natural gas producer unfair, the court ruled
for the defendants:
The evidence at trial made clear that full
bring-down opinions are the exception, not
the rule. Naturally, changes between the
date of a fairness opinion and the date of
merger completion can be so great as to
render an earlier fairness opinion unreli-
able…. In the circumstances [of this case],
there was no reason to incur the expense of
a completely new fairness opinion.14
The long-running Emerald Partners case, which
spawned a dozen Chancery decisions and seven
Supreme Court decisions in 16 years, addressed
the special committee’s obligation to seek an
updated opinion. In this case, the fairness opinion
had been updated for the proxy statement, but
the closing of the transaction had been materi-
ally delayed. Plaintiff alleged that an updated
opinion should have been obtained before
closing because of changed circumstances, but
the Court of Chancery ruled that “the defendants
could have decided the updated-fairness opinion
issue, in perfectly good faith, either way” and that
“whether or not that decision turned out to be
correct or wise, the Court is satised … that the
board’s decision was made on a rational basis.”15
14 Glassman v. Unocal Exploration Corp., 793 A.2d 329,
350 (Del. Ch. 2000); aff’d, 777 A.2d 242 (Del. 2001).
15 Emerald Partners v. Berlin, 2003 Del. Ch. LEXIS 42 (Del.
Ch. Apr. 28, 2003) at *66; aff’d, 840 A.2d 641 (Del.
2003).
Directors should consider whether their engage-
ment letter with its nancial advisor should obli-
gate the advisor to update or reafrm its fairness
opinion. Admittedly, this may be impractical in
many arm’s-length transactions where an ac-
quiror does not want the failure to receive an
updated opinion to be an “out” under a merger
agreement. In practice, it may be difcult for a
seller to negotiate a provision that would make
the transaction conditional on an updated fair-
ness opinion.
However, there is little reason for directors not
to demand an updated opinion in a related
party transaction, particularly when a control
shareholder is squeezing out minority share-
holders. Courts understandably apply greater
scrutiny to conicted transac tions than to arm’s-
length transactions. An updated opinion would
signicantly reduce the risk that shareholders
accept a transaction that, although fair when
negotiated, has become unfair because of sub-
sequent corporate or market developments and
would reduce the risk of an adverse decision in
litigation.
A fairness opinion should serve to protect not
only directors, but also the interests of sharehold-
ers. Directors and special committees in related
party transactions would be better protected,
and shareholders would be better informed, if
a fairness opinion was updated shortly prior to
mailing of a proxy statement. In the absence of an
updated letter, directors would be well advised
to ascertain whether the rm that rendered the
opinion continues to believe the transaction
would be fair. However, it would be more helpful
both to directors and shareholders if the fairness
opinion were updated prior to mailing. ◆
Gilbert E. Matthews, CFA, is chairman of the
board and a senior managing director of Sutter
Securities Inc. (San Francisco). He has more than
50 years of experience in investment banking and
has spoken and written extensively on fairness
opinions, corporate valuations, and litigation re-
lating to valuations.