Quote of the Day - I know the world isn't fair, but why isn't it ever unfair in my favor?
For the past 20 years, Wall Street brokers have hired white-shoe Wall Street law firms to render fairness opinions for the boards of directors and shareholders involved with mega-transactions. It all started with a little-known 1985 Delaware Supreme Court opinion, Smith v. Van Gorkom (free registration required), which ruled that a transaction otherwise apparently in the shareholder's best interests, might have been acceptable had a law firm issued an opinion regarding the fairness of the transaction.
Such opinions, commonly referred to as "fairness opinions" are not (yet) required by any Securities and Exchange Commission regulation or an Sarbanes-Oxley statute. They nonetheless are regularly issued, frequently costing around $1.5 million to complete. Those rules are about to change. Proposed Rule 2290 (scroll to top of page 3), which is currently being reviewed by the SEC, will likely require brokers and law firms who issue these opinions to disclose their relationship with the financial deal.
The problem arises from the insider nature of the transaction. It's the broker who hires the law firm. The law firm is then charged to advise the company that the transaction it is about to consummate, and pay a large contingency fee to the broker, and thus pay the law firm, is fair for all parties concerned. It would be hard for any broker to tell the attorneys to issue an opinion saying it's unfair. The law firm, therefore, is charged with advising its client, the brokerage house, that the transaction is fair, and to look for anyway to opine that it is fair.
Delaware may have begun to change its mind, however. In a December 21, 2005 ruling issued by Chancellor William B. Chandler, III, in In re Tele-communications, Inc. Shareholder Litigation, the Chancellor stated, "The contingent compensation of the financial adviser, [Donaldson, Lufkin & Jenrette], of roughly $40 million creates a serious issue of material fact, as to whether DLJ (and DLJ's legal counsel) could provide independent advice." Apart from the grammatical faux paux, the Chancellor may well have gotten it right.
Chandler didn't stop there, however, further criticizing the closeness of the parties. He complained, "[r]ather than retain separate legal and financial advisors, the Special Committee chose to use the advisors [DLJ] already advising TCI."
Brokers and companies involved in such deals would be wise to seek independent counsel from law firms with no relationship with any of the parties.