Brian Smiley mentioned in Wall Street Journal on clients’ $5,000,000 award for misleading M&A fairness opinion.
A New York Stock Exchange arbitration panel ordered CS First Boston Inc. to pay a total of $5 million to a group of doctors who claimed that the big investment bank gave a faulty fairness opinion in a 1992 merger of two medical companies.The award is the largest ever handed down at the Big Board in an arbitration case, securities lawyers said. And it’s apparently the first time an arbitration panel decided a case over a fairness opinion.
A fairness opinion is a formal review conducted by an investment bank, which examines a proposed merger or other transaction and decides whether the deal is fair to shareholders. Typically, when shareholders object to a fairness opinion, they file a civil lawsuit, and the case is decided by a judge or jury.
The award puts Wall Street investment banks on notice that they can’t simply act as a rubber-stamp in rendering such opinions, securities lawyers said. At the same time, some securities specialists worried that Big Board arbitrators aren’t equipped to handle such an issue, considering that many arbitrators aren’t schooled in the complex and arcane world of investment banking. Most securities arbitrations involve disputes with individual-investor accounts.
“I don’t think of arbitrators being particularly able to deal with those kinds of issues,” said Sam Scott Miller, a New York lawyer and former general counsel at PaineWebber Group Inc.
CS First Boston declined to comment, as did J. Boyd Page and Brian Smiley, partners at Page & Bacek, an Atlanta law firm that represented the plaintiffs.
The case stemmed from the 1992 merger that created Medical Care America Inc. The Dallas health-care provider was formed by the merger of Medical Care International Inc., an outpatient surgery company, and Critical Care America Inc., a home-infusion therapy concern. CS First Boston was paid $3 million to examine both companies and to certify to the holders of Medical Care International that the proposed merger terms were fair.
Though Medical Care officials claimed the merger would let the companies offer broader services at lower cost, intensified competition drove down prices for home-infusion services.
Indeed, only several weeks after the merger was approved in September 1992, Medical Care’s stock price plummeted 50% on news that the operating results for the Critical Care division would be much lower than projected, the doctors said in their claim filed with Big Board arbitrators.
The arbitration claim was filed a year ago by a dozen doctors who were former shareholders of Medical Care International. The claim accuses the CS Holding unit of relying on managements’ financial projections for its fairness opinion, rather than doing an independent analysis of the two companies’ financial statements.
Had CS First Boston “conducted even a minimal investigation of the financial statements and projections provided to it by [Critical Care America’s] management – rather than blindly relying on them – it would not have been able to issue the fairness opinion sent to the claimants, and the merger would never have been approved,” the arbitration claim says.
Indeed, the claim says CS First Boston conceded that it didn’t do any independent digging in the matter. CS First Boston’s fairness opinion, which was filed with arbitrators, said that “we have reviewed . . . financial forecasts provided to us by [Medical Care International] and Critical Care” and “we have not independently verified any of the foregoing information.”
Because of the allegedly faulty opinion, Critical Care was overvalued in the deal, the arbitration claim alleges. Thus, Critical Care shareholders received too many Medical Care America shares, and Medical Care International holders received too few Medical Care America shares under the stock exchange ratios certified by CS First Boston, according to the claim. The plaintiffs sought a total of $13 million in damages.
Without comment, the arbitration panel ordered CS First Boston to pay $4.5 million in damages, plus attorneys’ fees of $500,000.
By Michael Siconolfi