Series 79 practice questionhardFairness Opinions
An investment bank serving as both financial advisor and provider of a fairness opinion in a merger stands to receive a significant success fee contingent on deal completion. Which of the following best describes the primary concern with this arrangement?
- AThe arrangement is illegal under the Williams Act
- BContingent fee may undermine fairness-opinion independence✓ Correct answer
- CThe investment bank must waive its advisory fee to issue the opinion
- DThe SEC must pre-approve all fairness opinion fee arrangements
Explanation
Why B — Contingent fee may undermine fairness-opinion independence
When the financial advisor providing the fairness opinion has a contingent fee tied to deal completion, there is an inherent conflict of interest because the advisor has a financial incentive to opine that the deal is fair. This conflict must be disclosed in the proxy statement or tender offer documents. Some boards mitigate this by engaging a separate, independent financial advisor solely to render the fairness opinion, though this practice is not legally required in all jurisdictions.
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