Unfair Opinions?

NASD has been ''looking at a number of possible approaches to dealing with conflicts of interest in fairness opinions.''

The latest move to clean up perceived conflicts of interest on Wall Street is coming from the Street itself, as NASD contemplates new rules for fairness opinions.

Formal opinions about whether a merger or acquisition price falls within a fair range have been standard in deals since 1985, when the Delaware Supreme Court ruled that their use demonstrated a level of basic care by boards of directors. The potential conflict arises when the opinion is rendered by an investment bank that is also acting as an adviser to the acquiring firm and stands to collect a contingency fee if the deal goes through.

“We have been looking at a number of possible approaches to dealing with conflicts of interest in fairness opinions, including working with disclosure requirements,” says NASD spokesperson Nancy Condon.

But some critics say most companies already disclose contingency fees. “I don’t see a significant problem out there,” argues Jim Dawson, a securities attorney with Boston-based Nutter McClennen & Fish LLP.

Marjorie Bowen, head of Houlihan Lokey Howard & Zukin’s fairness opinion practice, agrees that most conflicts are already disclosed. She says that could mean NASD would have to go beyond disclosure to truly address the conflict.

One possible solution would be to require that fairness opinions be issued by firms that do not have an advisory role in the deal. Houlihan, the leading provider of fairness opinions, claims that as many as 95 percent of its opinions are issued on deals in which the firm has no other interest. “Selfishly, of course, it would be great if NASD suggested independence would be more appropriate,” says Bowen. But the association is unlikely to impose an independence requirement on its own members. “I would be shocked,” says Dawson. “It’s just not necessary.”

NASD is more likely to make existing disclosures mandatory. A potential addition: disclosure of golden parachutes held by executives. Revealing that a deal will trigger an executive payout could prompt boards with executive members to set up independent “special committees” to evaluate it, a technique currently used only when some board members have large ownership stakes in the deal. “That would definitely [reflect] a heightened sense of governance,” says Bowen. It would also put more focus on the deal-making motives of CEOs and CFOs.

Top Providers of Fairness Opinions
Firm Number of Deals*
Houlihan Lokey 23
JP Morgan 16
Goldman Sachs 13
Citigroup 11
Duff & Phelps 10
Morgan Stanley 10
* Through June 30, 2004
Source: Thomson Financial

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