5 Retain expert advisers. While there is no legal requirement for a special committee to seek financial, legal or other advice, failing to do so can increase the risk that the committee will not be adequately informed and that it will not be able to properly fulfill its mandate. These advisers should actively assist the committee in formulating its views and any recommendations to the board. The particular circumstances of each case will also inform whether a committee may be entitled to rely on the corporation’s external counsel and/or other advisers, or will require separate, independent legal and/or financial advisers to help it discharge its duties. – Although not all directors may be qualified to independently analyze the findings and recommendations of the financial and legal advisers, the committee members should satisfy themselves that the advisers’ review was thorough and complete. Courts will not be inclined to give much weight to expert opinions believed to have been based on inadequate preparation; accordingly, the committee should require the advisers to document the factual and analytical basis of their work and should review their advisers’ reports critically. 6 Avoid overreliance on fairness opinions. Special committees should remember that advisers are not a substitute for the committee’s own considered judgment. The committee will be called upon to exercise its judgment with a view to broader interests than those represented by the expert alone.
FAIRNESS OPINIONS: CONSIDERATIONS FOR SPECIAL COMMITTEES
Neither MI 61-101 nor corporate law expressly requires a transaction to be accompanied by a fairness opinion from the corporation’s financial adviser that the transaction’s terms are fair, from a financial standpoint, to the shareholders. This is in contrast to formal valuations, which can be required for certain insider bids, issuer bids, related party transactions and business combinations regulated by the instrument. Therefore, boards and special committees must determine whether one or more fairness opinions are required and, if so, the appropriate terms and financial arrangements for the advisers’ engagement. Those terms can be critical to the outcome of a transaction, including in determining whether a transaction is fair and reasonable to the shareholders or may be subject to legitimate opposition. In transactions involving material conflicts of interest, regulators expect disclosure of situations in which a fairness opinion was requested but the financial adviser was not able or willing to provide it. When an opinion is obtained, the public disclosure should provide shareholders with a meaningful understanding of the opinion and how it was considered by the board or the special committee. The disclosure should include details of the financial adviser’s compensation, independence, methodology and financial metrics used. Increasingly, in the transactional context, in addition to a fairness opinion provided to the full board, a second fairness opinion prepared by an independent financial adviser for the special committee may be appropriate. One of more long-form opinions, and more detailed disclosure by the issuer concerning the opinions, may also be prudent, depending on the surrounding context. Importantly, prior financial work products could amount to a prior valuation in law and trigger disclosure obligations under MI 61-101. Accordingly, management and boards of public issuers should also be careful when preparing valuation-like analyses of the company or its securities in circumstances in which they may not wish the details to become publicly disclosable in the future.
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Governance Insights 2020
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