How Fair are Fairness Opinions?

The recent acquisition of Bear Stearns by J.P. Morgan has cast a spotlight on the reliability of fairness opinions. On March 16, when the board of Bear Stearns agreed to sell the company for $2 a share, the investment banking firm Lazard Ltd., who was acting as Bear Stearns’ main adviser, provided the board with a fairness opinion that $2 a share was a fair price for the company, which was then teetering on the brink of bankruptcy. Eight days later, on March 24, when J.P. Morgan agreed to raise its offer to $10 a share to address shareholder discontent, the same investment bank issued a fairness opinion indicating that $10 a share was a fair price. If $10 a share is a fair price, how could $2 be a fair price as well?

This turn of events vividly illustrates how little has changed in the world of fairness opinions since the publication in 1989 of the first critical academic study of fairness opinions, Fairness Opinions: How Fair Are They and What Can Be Done About It? by Lucian Bebchuk and Marcel Kahan. This study highlighted two issues that generate serious problems with fairness opinions. First, investment banks have significant discretion in arriving at the fair price. Second, investment banks do not have incentives to provide an accurate valuation and might have incentives to provide a fairness opinion supporting the position of the party inviting the opinion. The study went on to advocate a judicial approach that takes these issues into account.

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