Fairness Opinions

This Article re-examines the fairness opinion, as well as its role and necessity in corporate control transactions. This Article argues that today\u27s fairness opinion regime is deeply flawed and, as a consequence, a fairness opinion has little meaning. The reasons are primarily this: the financial analyses underlying fairness opinions, as currently prepared by investment banks, are prone to excessive subjectivity and are frequently the product of valuation techniques that are not in accord with best practices. These defects are exacerbated by the recurring problem of these same investment banks who are conflicted in their provision of these opinions. Meanwhile, SEC and FINRA regulation of fairness opinions does not adequately address these fundamental issues while the Delaware courts continue to periodically reassert, without question, Smith v. Van Gorkom\u27s implicit fairness opinion requirement, thereby bestowing excessive significance to the fairness opinion. This Article, though, does not call for the fairness opinion\u27s death. Rather, I argue that the fairness opinion regime should be reformed through a quasi-public, standard-setting body. Creation of this body and its adoption of standards and guidelines for preparation of a fairness opinion and its undergirding financial analyses, as well as heightened disclosure requirements, should enhance the economics and usefulness of the fairness opinion by reducing subjectivity in valuation, ensuring proper grounding and permitting increased market scrutiny. Implementation of these reforms would also do more to alleviate the related and repeatedly cited problem of investment bank conflicts of interest than prior disclosure-based and other proposals. If these reforms are adopted, the fairness opinion, in and of itself, is still not a panacea. It will always be an inferior substitute for a market-based approach to determine the fairness of the consideration in a corporate control transaction. However, a valuation conducted with rigor and in accordance with disclosed standards and guidelines can inform materially as to value when a market-based price is unavailable or unobtainable. In such a context, a fairness opinion can have meaning. Even in such situations, though, the inherent limitations of state-of-the-art valuation should be recognized; a fairness opinion should only be one of many tools to assist a board in gauging what is a fair price. The Delaware courts should recognize this, repudiating Van Gorkom\u27s wholesale, implicit fairness opinion requirement when the agreed price is a market-based one. In other circumstances, a fairness opinion should not be required, but if received, should be considered by the Delaware courts as only one indicative factor to be utilized in assessing a board\u27s satisfaction of its duty of care

Lock-Up Creep

The article discusses a reported increase in the number of merger agreement lock-ups that have occurred as of June 2013, focusing on the causes of lock-up creep and its potential impact on the takeover market. It states that lock-up creep is a phrase that is used to describe a rise in the number and type of merger agreement contractual devices that buyers and sellers negotiate in an acquisition agreement. Attorney negotiations, bidders, and various legal cases are examined

Limits of Disclosure

One big focus of attention, criticism, and proposals for reform in the aftermath of the 2008 financial crisis has been securities disclosure. Many commentators have emphasized the complexity of the securities being sold, arguing that no one could understand the disclosure. Some observers have noted that disclosures were sometimes false or incomplete. What follows these issues, to some commentators, is that, whatever other lessons we may learn from the crisis, we need to improve disclosure. How should it be improved? Commentators often lament the frailties of human understanding, notably including those of everyday retail investors—people who do not understand or even read disclosure. This leads, naturally and unsurprisingly, to prescriptions for yet more disclosure, simpler disclosure, and financial literacy education. We believe that improvements in disclosure will not do much to prevent or minimize the effects of future crises. Indeed, the role of disclosure in investment decisions is far more limited, and far less straightforward, than is typically assumed. To caricature a bit for ease of exposition, the straightforward story is as follows: Read carefully, understand what you read, conduct any additional inquiry you deem appropriate, and then decide—if the security seems good, buy it; if not, don’t. Also, consider that whoever is selling you the security knows more than you do about it and has an incentive to present it more favorably than it warrants. But many investors, even sophisticated investors, do not start with cautious or neutral presumptions about a security and do not carefully read the disclosure to appraise the security on its merits before deciding whether to invest. As the literature extensively discusses, investors may be eager to buy “the hot new thing” that their peers are buying. Why do the peers buy it? One part of the story may be the old and often-told explanation: some investors tired of “boring” returns, saw an opportunity to supercharge their yields, and believed the perennial pitch made for new financial instruments—that they offered more return than risk. But our aim is not to explain what motivated investor behavior; our aim is to point out what did not sufficiently motivate investor behavior. Our argument is not just about the present crisis. Indeed, the complex role that disclosure plays in an investor’s decision as to whether to buy a security is just one example of disclosure’s limits. Those limits reflect the complexity of human decisionmaking. Why should disclosure work? The obvious answers are that better information should make for better decisions and that the specter of disclosure should constrain behavior. But these answers are importantly incomplete. Better information should, in principle, lead to better decisions, but other factors may be far more important. This was the case with disclosure regarding the securities at issue in the financial crisis. We discuss another example as well: executive compensation disclosures

Limits of Disclosure

One big focus of attention, criticism, and proposals for reform in the aftermath of the 2008 financial crisis has been securities disclosure. Many commentators have emphasized the complexity of the securities being sold, arguing that no one could understand the disclosure. Some observers have noted that disclosures were sometimes false or incomplete. What follows these issues, to some commentators, is that, whatever other lessons we may learn from the crisis, we need to improve disclosure. How should it be improved? Commentators often lament the frailties of human understanding, notably including those of everyday retail investors—people who do not understand or even read disclosure. This leads, naturally and unsurprisingly, to prescriptions for yet more disclosure, simpler disclosure, and financial literacy education. We believe that improvements in disclosure will not do much to prevent or minimize the effects of future crises. Indeed, the role of disclosure in investment decisions is far more limited, and far less straightforward, than is typically assumed. To caricature a bit for ease of exposition, the straightforward story is as follows: Read carefully, understand what you read, conduct any additional inquiry you deem appropriate, and then decide—if the security seems good, buy it; if not, don’t. Also, consider that whoever is selling you the security knows more than you do about it and has an incentive to present it more favorably than it warrants. But many investors, even sophisticated investors, do not start with cautious or neutral presumptions about a security and do not carefully read the disclosure to appraise the security on its merits before deciding whether to invest. As the literature extensively discusses, investors may be eager to buy “the hot new thing” that their peers are buying. Why do the peers buy it? One part of the story may be the old and often-told explanation: some investors tired of “boring” returns, saw an opportunity to supercharge their yields, and believed the perennial pitch made for new financial instruments—that they offered more return than risk. But our aim is not to explain what motivated investor behavior; our aim is to point out what did not sufficiently motivate investor behavior. Our argument is not just about the present crisis. Indeed, the complex role that disclosure plays in an investor’s decision as to whether to buy a security is just one example of disclosure’s limits. Those limits reflect the complexity of human decisionmaking. Why should disclosure work? The obvious answers are that better information should make for better decisions and that the specter of disclosure should constrain behavior. But these answers are importantly incomplete. Better information should, in principle, lead to better decisions, but other factors may be far more important. This was the case with disclosure regarding the securities at issue in the financial crisis. We discuss another example as well: executive compensation disclosures