The Delaware Chancery Court recently issued an opinion, In re BioClinica, Inc. Shareholder Litigation, curbing the potential for a flood of breach-of-fiduciary-duty claims based on "weak" fairness opinions that could have resulted from the court's decision earlier this year in Koehler v. NetSpend Holdings Inc.
In NetSpend, the court found a reasonable likelihood that NetSpend's directors failed to satisfy their fiduciary duties in connection with negotiating a sale of the company based on a number of factors, including their reliance on a fairness opinion the court characterized as "weak." The court found the opinion to be weak primarily because the deal price fell below the bottom end of the range of one of the analyses – discounted cash flow – supporting the opinion. The court's characterization of the fairness opinion is troublesome for directors and deal professionals because it is not uncommon for a deal price to fall outside of the range of one of the analyses supporting an overall opinion of fairness. In addition, the conclusion of a typical fairness opinion – that the consideration to be paid to a class of security holders is fair, from a financial point of view, to those holders – makes no reference to how fair, or how strong or weak, the opinion is. NetSpend therefore could suggest that fairness opinions on which directors rely, as permitted by Delaware law, would not provide the protection they anticipated. Similarly, possible litigation relating to the relative strength of a fairness opinion, an issue never addressed in opinions, presented new potential issues for investment banks.
In the current age of nearly universal litigation of public M&A transactions, it did not take long for the court to clarify and limit the scope of the NetSpend decision. In the BioClinica decision, the court emphasized that NetSpend was a context-specific decision, determined in significant part by the fact that NetSpend involved a single-bidder scenario. In contrast to the NetSpend board, the BioClinica board conducted an auction over an eight-month period and solicited more than 20 potential buyers, both strategic and financial. The court clarified that the "strength" or "weakness" of a fairness opinion is "particularly important" in the single-bidder context because it is the "only mechanism through which the board can demonstrate that, had a market check been conducted, no superior offer would have emerged." As such, a fairness opinion is "the only equivalent of a market check in single-bidder circumstances."
The BioClinica case is a welcome clarification that Delaware courts will not judge every fairness opinion by its "strength" in the future, and plaintiffs' lawyers will not be able to rely on assertions of weak fairness opinions to sustain most breach-of-fiduciary-duty claims going forward. Nonetheless, investment banks and boards of directors should recognize several key points from this line of cases:
- The plaintiffs' bar and courts are scrutinizing fairness analyses in increasing detail.
- In the absence of a robust sale process, a fairness opinion may be subject to a higher level of scrutiny by Delaware courts than in other situations.
- The fiduciary duty analysis in the M&A context remains an intensively fact-specific analysis in which precedents provide helpful reference points – rather than absolute guideposts – that must be examined in the context of the transaction under consideration.