August 15, 2006
Summary: Comments Submitted on Proposed NASD Fairness Opinion Rule
Thanks to Kevin Miller of Alston & Bird, below is a summary of the comments submitted to the SEC on proposed NASD Rule 2290 regarding fairness opinions (Release No. 34-53598, April 4, 2006):
1. Association of the Bar of the City of New York
– 2290(b)(3) – strongly believes that it is ill advised (and inconsistent with the approach taken in balance of the rule) to require that members have processes to evaluate whether the amount and nature of the compensation from the transaction underlying the fairness opinion benefiting any individual officers, directors or employees or class of such persons relative to the benefits to shareholders of the company is a factor in reaching a fairness determination and suggests that if the SEC and NASD nevertheless determine to adopt such a requirement, that they incorporate a safe harbor for differential benefits approved by a committee of independent directors (along the lines of the safe harbor in recently proposed amendments to Rule 14d-10) or not exceeding a de minimus value threshold;
– 2290(a)(3) – would not support an amendment to expand disclosure of material relationships to include affiliates of companies involved in the transaction underlying the fairness opinion because of (A)the
difficulty in obtaining information in the tight time frame many fairness opinions are prepared; (B) would necessitate conveying information across internal informational barriers erected in part to avoid conflicts; and (C) would unnecessarily risk inaccuracies, particularly in light of duplicative information (at least with respect to the member’s client and its affiliates) required by Item 1015 of Regulation M-A;
– 2290(a)(1), (2) and (3) – would not support an amendment to require that fee
disclosures be quantified, though would support additional disclosure if such amounts exceeded 5% of the member’s revenue, assets or market capitalization;
– would not support an amendment to require that contingent fees or other relationships be characterized as conflicts of interest;
– believes it unnecessary and inappropriate to consider expanding required disclosure to cover material relationships between parties to the transaction underlying the fairness opinion and affiliates of the member providing the opinion because of the difficulty in obtaining such information due to (A) the complex nature of large, diverse, global financial services companies of which many members are a part; (B) the existence of informational barriers addressing important legal and regulatory issues; and (C) privacy laws that may exist in certain jurisdictions – also notes that it may be counterproductive to require members to inform themselves of material relationships that could pose a conflict when they might otherwise have remained unaware of the relationship with the member’s affiliate;
– in response to query regarding a possible requirement that members disclose the type of verification they undertook with respect to information provided by their client that formed a substantial basis for the member’s fairness opinion, notes that the current practice is for members to disclose in their opinions that they do not independently verify any information and assume the accuracy and completeness of all information they are provided or rely upon – would not oppose a rule requiring disclosure of the current practice whether as a general matter or with respect to each category of information that provided a substantial basis for the opinion;
– continues to believe it impractical and inappropriate, and would not support an amendment requiring members, to verify or obtain verification for information provided by their client that formed a substantial basis for the member’s fairness opinion – members often don’t have adequate familiarity, time or expertise to verify information and much of the information on which they rely is inherently unverifiable;
– does not believe it necessary to disclose the procedures utilized in the fairness opinion; and
– a variety of technical comments seeking clarification and addressing wording issues. Otherwise generally supportive of proposed rule as currently drafted
2. Houlihan Lokey Howard & Zukin Capital
– supports quantification of fee disclosures required by 2290(a)(1), (2) and (3), including disclosure of the amount of the fee for rendering a fairness opinion and the amount of the overall fee contingent on completion of the transaction;
– supports disclosure of “material” or “significant” relationships rather than “conflicts of interest”;
– does not support requirement that members describe the type of verification they undertook with respect to information that formed a
substantial basis of their opinion and does not support requirement that they obtain independent verification; and
– supports rule requiring procedures designed to ensure appropriate internal review of fairness opinions but does not believe additional disclosure regarding such procedures is necessary, as other rules and current proxy disclosure requirements are adequate.
3. Securities Industry Association
– Scope of 2290 – overbroad and vague – should only apply to opinions “reasonably likely to be included or summarized or referred to in disclosure documents required to be filed with the SEC;
– 2290(a)(1) – technical suggestion modifying language of rule to apply to “financial advisor to any company that is a party to the transaction” rather than “financial advisor to any transaction”;
– 2290(a)(2) – generally supportive of requirement that members be required to disclose fees or payments contingent on consummation of transaction but requests clarification that such requirement only apply to fees or payments from parties to a transaction and that the proposed rule not require members to collect information over internal informational barriers established for regulatory purposes; not supportive of any requirement that fees be quantified or that contingent fees or prior relationships be characterized as conflicts;
– 2290(a)(3) – suggests limiting required disclosure of material relationships between member and parties to the subject transaction to financial advisory services, underwritings and capital markets services, lending and financing arrangements, and merchant banking or private equity relationships involving direct equity investments in parties to the subject transaction, but not market making, asset management or research coverage; believes extending disclosure requirement to material relationships between parties to the transaction and affiliates of the member would be difficult unless limited to affiliates that are consolidated subsidiaries of the member or its parent holding company;
– 2290(a)(4) – not supportive of a requirement that members independently verify information supplied by its client that formed a substantial basis for the fairness opinion or obtain independent verification of such information;
– 2290(a)(5) – supports requirement that fairness opinions disclose whether the opinion was approved or issued by a fairness committee;
– 2290(b)(1) – generally supportive of requirement that members have procedures addressing the process by which fairness opinions are approved provided rule clarified to permit members of fairness committee to “advise” deal team with respect to appropriate negotiating strategies, etc. in the ordinary course;
– 2290(b)(2) – supports requirement that members have procedures that address the process by which fairness opinions are approved, including the process to determine whether the valuation analyses were
– 2290(b)(3) – believes it inappropriate to require members to adopt policies or procedures to evaluate the amount and nature of compensation that individual officers, directors or employees will receive from the underlying transaction relative to other parties.
4. Council of Institutional Investors
– Supports proposed Rule 2290 and encourages SEC to work with other exchanges to ensure adoption of similar rules.
– Supports the required disclosures and procedures in the proposed rule but suggests rule be augmented to require procedures to (i) determine the circumstances under which an opinion should be updated and (ii) address, prior to public distribution of a fairness opinion in a proxy statement or similar document whether the opinion should be reaffirmed or withdrawn. Also suggests that if the date of an opinion in a proxy statement is not proximate to the date of the proxy statement, the member should be required to disclose the basis on which it determined not to update its opinion. [Note: not clear how the latter is to be accomplished as the member does not control the content or date of the proxy statement or whether its client desires/requests a bring-down opinion]
6. Donna Hitscherich, Columbia University Graduate School of Business
– References co-authored research paper entitled “Banker Fees and Acquisition Premia for Targets in Cash Tender Offers: Challenges to the Popular Wisdom on Banker Conflicts” which concludes that there is no evidence that a higher proportion of contingent fees or previous work for acquirors have an adverse impact on acquisition premia.
7. Michael Kane, President and CEO, Kane & Company
– Supports quantification of compensation arrangements where disclosure of such arrangements is required by proposed Rule 2290 and supports requirement that members state that a conflict may exist and describing the impact of such conflict on the fairness opinion, including a description of the compensation structure (whether or not contingent) and the amounts at stake;
– Supports a disclosure requirement covering material relationships between the parties to the transaction and affiliates of the member providing the fairness opinion;
– Does not support a potential requirement that members verify information or obtain independent verification; and
– Does not support a potential requirement that members disclose the procedures utilized in fairness opinions – current proxy disclosure is adequate.