New NASD Rule Regarding Fairness Opinions
Approved by the SEC

The SEC approved the new NASD Rule 2290 (the "Rule") regarding Fairness Opinions, effective December 8, 2007. The Rule supplements existing disclosure requirements by requiring broker/dealers that render fairness opinions to disclose to public investor-shareholders, potential conflicts of interest that may exist between the firm rendering the fairness opinion and the issuer. Further, compliance with the Rule requires specific procedures concerning the issuance of fairness opinions.

Generally, a fairness opinion addresses, from a financial point of view, the fairness of the consideration in a transaction and is routinely used by directors of companies in connection with a change of control transaction, such as a merger or sale or purchase of assets, to satisfy their fiduciary duties to act with due care and in an informed manner. Although not required by statute or regulation, fairness opinions have become commonplace in change of control transactions, following the 1985 Delaware Supreme Court case of Smith v. Van Gorkom. In that case, a corporate board was held to have breached its fiduciary duty of care by approving a merger without adequate information on the transaction, including information on the value of the company and the fairness of the offering price.

In addition to providing a basis for the exercise of care by the board of directors, a fairness opinion, or information about a fairness opinion, is often provided to shareholders as a part of the proxy materials relating to a change of control transaction. Fairness opinions express a conclusion as to whether the consideration offered in a transaction is within the range of what would be considered "fair." Such opinions generally do not offer an opinion as to whether the consideration offered is the best price that could likely be attained, nor does it generally reach other matters, such as solvency issues, that may arise from the transaction.

The Rule sets forth the parameters when the disclosures are required to be contained in a fairness opinion. If a member firm knows or has reason to know, at the time a fairness opinion is issued to a company's board, that the opinion will be provided or described to the company's public shareholders, the firm must make the enumerated disclosures in the fairness opinion. A firm will be deemed to have a reason to know that the fairness opinion will be provided or described to public shareholders, if, for example, the structure of the transaction will require a shareholder vote. The fairness opinions covered by the Rule include those issued to the board of directors, and or any special committee or other subset or committee of the board.

The specific disclosures addressed by the Rule where a broker/dealer issues a fairness opinion that will be disclosed to a company's public shareholders must include the following:

• If the broker/dealer will receive any compensation contingent on the successful completion of the transaction for rendering the opinion or acting as a financial adviser to any party to the transaction or otherwise;
• Any contemplated or existing material relationships involving the payment or receipt of compensation between the broker/dealer and any party to the transaction during the last two years;
• If the firm has independently verified any information supplied by the company requesting the fairness opinion, which is a substantial basis for the opinion and, if so, describe the information;
• Whether the fairness opinion was approved or issued by a fairness committee; and
• Whether the fairness opinion expresses an opinion about the fairness of the compensation to any of the company's insiders, relative to the compensation to the company's public shareholders.

The Rule also requires that any member firm issuing a fairness opinion must have written procedures for approval of a fairness opinion, including:

• When a member will use a fairness committee and where a fairness committee is used, the firm must disclose:
  o The process for selecting personnel to be on the fairness committee;
  o The necessary qualifications of persons serving on the fairness committee; and
  o The process to promote a balanced review by the fairness committee, which shall include the review and approval by persons who do not serve on the deal team to the transaction.
• Specifying the process to determine that valuation analyses used are appropriate.

Due to the December 8th effective date for the Rule, firms engaged in the issuance of Fairness Opinions, either directly or through affiliates, need to assess their business activities and processes related to the issuance of Fairness Opinions and document and implement procedures addressing the specific requirements of the Rule.