The National Association of Securities Dealers (NASD) is trying to resurrect its 2005 proposed rule establishing disclosure and procedural requirements regarding the issuance of fairness opinions. The revised proposed rule requires the following six items to be disclosed if a fairness opinion will be provided to a company’s stockholders: (1) whether the investment bank has acted as a financial advisor to any party to the transaction; (2) whether the investment bank will receive any significant payment contingent upon the successful consummation of the transaction; (3) whether any material relationships existed during the past two years and whether there are expected future relationships between the investment bank and the company; (4) whether information used to form the opinion was supplied by the company and if so, whether the investment bank independently verified that information; (5) whether the opinion was approved or issued by an investment bank’s internal fairness committee; and (6) whether the opinion discusses the amount or nature of compensation to the company’s officers, directors or employees, or class of such persons relative to the compensation to public stockholders of the company. Only items 5 and 6 will result in a change from current practices. It is important to note that item 6 does not require investment banks to give an opinion whether compensation given to management as part of the transaction is fair. Item 6 merely requires that if an opinion does discuss relative compensation matters, then such discussion must be disclosed to the stockholders
Also of importance is the term “significant” in item 2. A “significant” payment is any payment that a reasonable reader of the opinion would have an interest in knowing about in order to assess whether the investment bank rendering the opinion had a potential conflict of interest. The NASD specifically chose not to set a precise amount because “significant” may vary based on the type and size of the transaction. Significant payments exclude de minimis payments, however, such as trading fees or other small incremental fees from account assets.
The NASD proposed rules intend to bring assurances to investors that the process resulting in an opinion is itself fair by increasing the transparency of the fairness opinion process and the relationships underlying that process. In doing so, the NASD may stymie a rush to the courts for similar situations as those found in several recent Delaware cases, such as Caremark, Topps and Ortsman,in which plaintiffs alleged insufficient disclosure relating to the fairness opinions issued in those transactions.