SEC revises rules on fairness opinions

THE SECURITIES and Exchange Commission has approved tighter guidelines on the valuation and issuance of fairness opinions related to tender offers, to make sure that the investing public would not be shortchanged by such equity transactions.

In a new memorandum circular approved by the SEC en banc last week, the corporate regulator cited the need to “increase the quality and reliability” of fairness opinions being issued prior to the conduct of a mandatory offer and align local framework with best practices in other jurisdictions.

Tender offer refers to the requirement for new investors to buy out the shares of other shareholders to give them a chance to exit when there is a change in ownership control.

The offer—including the usually sensitive issue of pricing—has to be supported by a fairness opinion provided by an “independent financial advisor or equivalent third party.”

The guidelines state that only independent firms that meet the SEC’s qualifications may conduct such valuation and issue a fairness opinion.

“Independence” was defined as ab- sence of any business interest or family relationship with any party to the transaction or any of its directors, officers or major stockholders, that could, or could reasonably be perceived to materially interfere with the exercise of professional judgment.

The SEC said the following requirements must be observed in the conduct of the valuation and issuance of a fairness opinion by an accredited firm:

The individual who acts on behalf of the accredited firm must be a licensed professional with at least 10 years of experience in accounting, finance or economics and holds relevant advance degree;

The firm must use the most concurrent data—not more than three months old—and adopt values derived from using different methodologies to minimize risk that the opinion is unreliable;

If the firm’s valuation of a company materially differs from the market price of the company’s securities prior to the announcement of a proposed transaction, the firm shall comment on the difference and the underlying factors;

The firm must not include prospective financial information (including forecasts and projections) unless it has made sufficient inquiries to satisfy itself that the information on which it relied was prepared on a reasonable basis;

The firm must notify the party commissioning the report within two days from date of its knowledge of a significant change, which may affect the contents of the report or from date of its conclusion that a material statement in the report is misleading or deceptive.

The SEC also outlined the information that must be incorporated in the fairness opinion report, such as justification of the choice of methodologies and description of methods; a disclosure on whether the firm acted as a financial advisor to any party to the transaction and whether or not it will receive compensation contingent on the successful completion of the transaction; material relationships during the prior two years and discussion on any material difference between the valuation set and market price.

Doris C. Dumlao