Meaning
Judicial standards applied to corporate transactions evaluate both the price and the process when a conflict of interest exists among fiduciaries. Entire fairness is the most rigorous level of review used by courts to determine if a merger or acquisition was handled correctly. It requires the defendants to prove that the deal was the result of fair dealing and resulted in a fair price.
This standard is typically triggered when a controlling shareholder is on both sides of a deal.
Transaction Audit
Legal readiness for a challenge under this standard involves documenting every step of the negotiation. An audit will look for the use of independent committees and the advice of outside financial experts. If the process is found to be flawed, the entire transaction may be voided or damages may be awarded.
Proving fairness is a heavy burden that requires a demonstration of arm’s length bargaining.
Valuation Burden
The capability of a board to justify the final price depends on the quality of the valuation reports it commissioned. A price that seems high to the buyer or low to the seller must be backed by market data and discounted cash flow analysis. Because the court examines the substance of the deal so closely, there is no room for vague justifications.
The cost of a failed valuation is the total loss of the transaction’s legal standing.
Litigation Risk
Calling a deal ready for close before it can pass this test is a dangerous strategy. The expense of defending an entire fairness claim can exceed the projected gains of the deal itself. Demonstrated rates of success in these cases suggest that early transparency and independent oversight are the only reliable defenses.
A firm must have the organizational capacity to manage these complex legal requirements.
