Entire Fairness Test
If the person attacking the transaction demonstrates that those involved in the decision making process lack independence, then some courts (for example, the Delaware Court) will apply the so called “Entire Fairness” test. This takes away the presumptions of the Business Judgment Rule, and shifts the burden to the fiduciary to prove that the process followed was fair (so called “fair dealing”) and the price achieved was fair.
Typically, Fairness Opinions do not address the fair dealing element of the Entire Fairness Test and focuses only on the fair price element. However, Marshall & Stevens does offer, in an appropriate case, an opinion which addresses the commercial (i.e. non-legal) elements of fair dealing. This is not, however, a part of a standard Fairness Opinion, and a matter of separate engagement and contract.
The Fair Dealing Element of the Entire Fairness Test looks at the various procedural elements of the transaction, including:
- Whether the timing of the transaction benefited the proponents of the transaction to the detriment of the company or its minority shareholders – who initiated negotiations and why;
- Whether the structure of the transaction favored insiders to the detriment of the company or its minority shareholders;
- Whether the negotiation of the transaction was conducted, controlled or overseen by competent and independent individuals free of conflict of interest;
- Whether a competitive bidding process was implemented so as to maximize shareholder value;
- Whether the directors were fully informed and provided with all relevant information; and
- Where shareholder approval is required, whether the shareholders were fully informed and provided with all relevant information.
The Fair Price Element of the Entire Fairness Test takes into consideration all of the economic and financial aspects of the transaction including:
- Market value of the company’s shares,
- Earnings (discounted cash flow analysis)
- Underlying asset values,
- Future prospects,
- Potential synergies related to the transaction, and
- Any other elements that affect the intrinsic value of the company or its shares.