The Delaware Court of Chancery recently determined the value of ISN Software Corporation stock to be $98,783 per share, 158% more than the merger price. ISN did not rely on a financial advisor, investment bank, or fairness opinion, but self-determined that its stock was fairly valued at $38,317 per share. Petitioners Polaris and Ad-Venture objected, and promptly filed suit.
In general, a fairness opinion is an analysis conducted by a third party valuation firm or investment bank that assesses whether the terms of a transaction are fair, from a financial point of view. If properly done, a fairness opinion is a powerful method to protect boards of directors, trustees and other corporate fiduciaries (collectively referred to herein as fiduciaries) from transaction-related liability. Unfortunately, too often, fiduciaries associate fairness opinions with acquisitions of large, public companies. Indeed, obtaining a fairness opinion is a best practice when considering a wide range of transactions, including minority redemptions, recapitalization, combinations and spin-offs, just to name a few. Moreover, a fiduciary’s duty of care is no less important when such transactions involve a closely-held company. Deeming fairness opinion studies too expensive, time consuming, or simply unnecessary, fiduciaries of privately held firms routinely engage in corporate transactions without relying on them. In reality, however, these same fiduciaries may, in fact, be more at risk than their publicly traded counterparts due to heightened appearances of conflicts of interest and self-dealing.