DealLawyers.com Blog

This new memo from Wachtell Lipton describes a new Delaware Chancery Court case – In re TeleCommunications Shareholders Litigation – that could significantly impact how deals are done. Among other issues, the decision deals with:

– investment banker contingent fee arrangements
– how advisors are selected
– how comparable transactions are selected for fairness opinions
– the nature of fairness opinions (“relative fairness opinions”)
– who sits on special committees
– how special committee members are compensated
– special committee responsibilities and obligations

A copy of this opinion is posted in our “Fairness Opinion” and “Special Committee” Practice Areas.

Revised Proposal on Fairness Opinions

Early in December, the NASD filed an amendment to its proposed Rule 2290 with the SEC – the SEC has not yet published the revised proposal for public comment. Given that the NASD likely revised its proposed Rule in response to comments from the staff of the SEC, the rule might be adopted soon after the SEC’s comment period runs.

The revised proposal includes both disclosure and procedural changes as follows:

A. Disclosure

1. an amendment to paragraph (a) of the proposed result so that it will apply to all fairness opinions that may be provided, or described, or otherwise referenced to public shareholders, not just those “that will be included in a proxy statement”. The amendment reflects the fact that fairness opinions are technically not required to be included (thought they typically are) but merely described in SEC filings and that, in addition to proxy statements, opinions may be described or included in tender offer responses filed on 14D-9, in S-4/F-4 Registration Statements and in 13E-3 (going private) transaction statements.

2. amendments to paragraphs (a)(1) and (2) to clarify that the fee disclosures contemplated by the proposal are intended to be descriptive rather than quantitative. It will be sufficient for investors to be informed that a portion of the compensation for rendering a fairness opinion is contingent upon the completion of the transaction without necessarily quantifying the amount. Similarly required disclosures under paragraph (a)(3) regarding material relationships need only disclose the existence of the relationship, not the amount of compensation derived from each such relationship.

3. an explanatory note confirming that while Item 1015 of Reg MA promulgated by the SEC requires disclosure of material relationships with the opinion provider’s client and its affiliates, paragraph (a)(3) of proposed Rule 2290 purposely requires disclosure of material relationships with the other party to the transaction as well, but doesn’t currently cover affiliates. The NASD will review comments provided to the SEC to see whether the disclosure should be further broadened to cover affiliates of both parties to the transaction.

4. an amendment to paragraph (a)(4) to clarify that rather than relying on current boilerplate, members must disclose the “categories of information” such as projected earnings and revenues, expected cost-savings and synergies, industry trends and growth rates, etc. that formed a substantial basis for their fairness opinion and with respect to each such category, whether the member has independently verified the information supplied by the company.

5. an amendment to paragraph (a)(5) to clarify that the only required disclosure would be whether the opinion had been approved or issued by a fairness committee not that required procedures were followed.

b. Procedures

1. an amendment to paragraph (b)(2) acknowledging that appropriate procedures depend on the nature of the transaction as well as the type of company.

2. editorial amendments to paragraph (b)(3) to remove any implication that compensation received by individual officers, directors or employees, or class of such persons, is inappropriate. The revised proposed rule requires members to have a process to evaluate “whether” – and not ” the degree to which” – the amount and nature of compensation from the transaction benefits any such persons, relative to the benefits to shareholders of the company generally, is a factor in reaching a fairness conclusion.