How Fair are Fairness Opinions?

JPMorgan’s recent forced do-over on the acquisition of Bear Stearns has shined a spotlight on the reliability of fairness opinions, writes Jim Naughton, co-editor of Harvard Law School’s Corporate Governance Blog.

When Bear Stearns’ board agreed to sell the company for $2 a share on March 16, investment banking firm Lazard Ltd. – Bear Stearn’s main adviser at the time – provided a fairness opinion that the sale was price was fair for the company. Eight days later, though, the same investment bank issued a fairness opinion saying that JPMorgan’s raised offer of $10 a share to address shareholder discontent was also fair.

Naughton writes that the turn of events shows how little has changed in fairness opinions since a study was published in 1989 by Harvard Law Professor Lucien Bebchuck and NYU Law Professor Marcel Kahan. “If $10 a share is a fair price, how could $2 be a fair price as well?” Naughton writes.

The study – Fairness Opinions: How Fair are They and What Can be Done About It? – highlighted two issues that generate significant problems with fairness opinions, according to Naughton. One, investment banks have substantial discretion in arriving at the fair price, and two, investment banks don’t have incentives to provide an accurate valuation and might have incentives to provide fairness opinions supporting the position of the party inviting the opinion.

“The Bear Stearns event suggests that the problems identified by the academic critics of fairness opinions might well persist,” Naugthon writes. “It also highlights the limits on the ability of investors and courts to rely on such opinions.”