What's Fair is Fair?
Boards of directors have engaged investment banking firms to provide fairness opinions for many years. Questions about the fairness of many fairness opinions have also been raised for many years.
A recent Dealbook column in The New York Times by Andrew Ross Sorkin ("Mergers: Fair Should be Fair" Sunday, March 20, 2005) discusses the issue of fairness opinions one more time.
It is often thought that boards obtain fairness opinions in order to assure the fairness of transactions from the viewpoint of their companies' shareholders. However, the real reason that fairness opinions are obtained is to protect boards from lawsuits arising from corporate transactions. This has always been true, but especially since the landmark Delaware case of Smith v. van Gorkham was decided in 1985. While this and subsequent cases do not require the use of fairness opinions, they make clear that their use helps assure that boards have exercised their "duty of care" in the exercise of their business judgments.
There are numerous nuances to the definition of fair, but one or two in particular are instructive (definitions found at Merriam-Webster OnLine):
"6 a : marked by impartiality and honesty: free from self-interest, prejudice, or favoritism <a very fair person to do business with> b (1) : conforming with the established rules : allowed (2) : consonant with merit or importance: due <a fair share > c : open to legitimate pursuit, attack, or ridicule < fair game>
10 : sufficient but not ample: adequate <a fair understanding of the work>"
On the one hand, to be fair is to be marked by impartiality and honesty and to be free from self-interest and favoritism. On the other hand, the concept of fair does not imply an abundance, but rather a sufficiency.
In some respects, the investing public has been led to believe that if a company obtains a fairness opinion for a transaction, it is offering the best possible deal to its shareholders. Simply not so.