History of Fairness Opinions

In 1985, the Delaware Supreme Court ruled that the individual board members of a publicly traded company were grossly negligent in approving an acquisition because they failed to adequately inform themselves of how the purchase price was determined as well as to inform themselves of the company’s value. The Court’s finding undermined the protection afforded individual board members by the business judgment rule, and the defendant directors were found to have breached the duty of care owed to the company’s shareholders.

The lack of a fairness opinion was specifically noted by the Court. While the ruling points out that the law does not specifically require a fairness opinion by independent investment bankers, the fact that the lack of one may have played a role in the Court’s decision to shift liability to the individual directors argues that fairness opinions serve as a vital protection to the board members of any company that accepts a merger or acquisition price.



Almost all fairness opinions address the deal’s absolute fairness – whether the deal price represents adequate financial consideration for the asset to be transferred. Typically, opinions of absolute fairness compare an opinion of the value of the underlying business enterprise with the deal price. From the seller’s perspective, if the deal price is greater than or reasonably close to the opinion of the value of the underlying enterprise, the analyst issues an opinion that the deal is fair.

In some instances, issues of relative fairness arise. This refers to whether the total deal consideration paid is shared fairly among the stakeholders. Opinions of relative fairness might address noncompete or other employment agreements given to certain stakeholders, or the allocation of deal proceeds between classes of stock.

Procedural fairness refers to whether the process by which the transaction was approved is likely to result in a fair deal. Not all transactions result from a well-planned auction process that allows for adequate market exposure; some deals involve family members, management buyouts or unexpected offers. In these situations, the lack of procedural fairness might result in questions regarding the transaction’s absolute fairness.


In response to concerns that many fairness opinions were issued by investment bankers who stood to collect only if the deal was consummated, the Financial Industry Regulatory Authority issued new disclosure rules in 2007 to allow board members and shareholders to assess the independence of those who issue fairness opinions. Under the new rules, FINRA member firms who issue fairness opinions are required to disclose a number of items related to whether the relationship that exists between the firm and the parties involved and whether contingent fees can be by the firm.

In addition to these requirements, in November 2009, the Securities and Exchange Commission (SEC) enacted a FINRA Rule change that created the Limited Representative – Investment Banking (Series 79) category of registration. This category requires all associated persons of a FINRA member firm engaging in investment banking activities to register in the new category and pass a qualification exam. The category specifically includes fairness opinions.



While FINRA can only regulate its members, we believe that the SEC’s approval of the new Series 79 category signals the SEC’s intent to define the boundaries of its authority to include such merger and acquisition related activity. Regardless of where the SEC’s boundaries fall, we believe that the following are advantages of using Series 79 licensed professionals at a FINRA member firm:

  • Professionals who hold a Series 79 license have passed an examination that, “seek[s] to measure the degree to which each candidate possesses the knowledge, skills, and abilities needed to perform the major functions of an…investment banker.” The exam includes specific topics such as fairness opinions. These professionals are also required to stay up to date on relevant legislation, regulation, and policy (through personal study and a required firm administered continuing education program) and must complete a FINRA administered continuing education exam every two years.
  • Professionals that have the Series 79 license must be associated with a FINRA member firm. As a result, they must pass FINRA’s background check, including a submission of fingerprints to the FBI and other verification that the individual has not engaged in fraudulent or illegal activities. This verification mitigates the potential liabilities associated with utilizing a fairness opinion prepared by an individual with a history that might discredit its validity.
  • Utilizing unlicensed professionals or unregistered broker/dealers could potentially have significant legal ramifications. The Securities Exchange Act of 1934 states in Section 29(b) that, “Every contract made in violation of [this Act] the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of [this Act], shall be void…” A violation of the Act would include unregistered broker/dealers performing the activities of a broker/dealer which are defined in the act to include persons or firms being, “engaged in the business of effecting transactions.” The approval of the Series 79 may suggest that the SEC considers fairness opinions as “effecting transactions.” However, we are not aware of any case where the SEC has voided an M&A transaction due to the use of an unregistered broker/dealer for a fairness opinion.
  • Professionals with a Series 79 license are required to make the appropriate disclosure requirements from FINRA Rule 5150 – Fairness Opinions. If the fairness opinion will be provided to public shareholders, FINRA requires a member make disclosures including if it has acted as an advisor to the transaction, how it was compensated for the advisory role and fairness opinion, and any material relationships (including contemplated) between the member and the parties of the transaction.
Our Policy

Our Policy

At DCF, we take our licensing and independence seriously. We believe that our policies have additional benefits for those in need of fairness opinions, as well as those in the four bulleted items above. In addition to the FINRA background check, we perform independent background checks on all of our professionals. Many of our professionals also hold senior appraisal credentials, which demonstrate significant knowledge of appraisal techniques, as well as hold them to ethical, disclosure, procedural, and reporting requirements that in many ways surpass the FINRA regulations. As a matter of policy, we do not perform fairness opinions on a contingent or success fee basis, nor do we provide fairness opinions on deals that we are also the lead sell or buy-side advisor. We believe that FINRA’s required disclosures on compensation and relationships do not eliminate the reality that such compensation and relationships discredit the independence of the fairness opinion.

Our professionals have many years of experience valuing businesses and performing fairness opinions for many clients, including publicly held companies. In the current market and regulatory environment, we anticipate increased scrutiny of individual directors’ actions and of the fairness opinions on which they rely. We recommend that general counsel, special counsel, and members of Boards that are considering a transaction seek to independently verify proposed transaction prices.

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