1. Kevin Miller discusses the aftermath of the Toys-R-Us decision by Vice Chancellor Strine regarding potential conflicts of interest when an advisor provides both sell-side and buy-side services. 2. Miller believes Strine's criticism was focused on auctions where Revlon duties apply, not other M&A situations. Second opinions may be more useful outside of auctions to address duty of care concerns over conflicts. 3. While Strine was critical of "less distinguished" opinions, Miller believes smaller firms can provide valuable industry expertise. Strine also appeared to allow for stapled financing more than late approvals of buy-side work. 4. Ultimately, the key is for boards to clearly

1. PLI: The Toys decision and Vice
Chancellor Strine’s subsequent
comments have generated a
fair amount of uncertainty and
confusion regarding the efficacy
of second opinions in the M&A
context. Can you give some
background and make some sense
of the decision and those comments
from a practitioner’s perspective?
KEVIN MILLER: First some
background. In the Toys-R-Us
(Toys) decision, Vice Chancellor
Strine criticized the decision of the
Toy’s board to allow its financial
advisor to finance the winning
bidder, creating “an appearance of
impropriety by taking $10 million
of fees for arranging financing for
the acquirers”
Point - “[The Financial Advisor]
did create for itself, and therefore
its clients, an unnecessary issue….
The [decision of the Financial
Advisor to request the Board’s
consent to provide financing to the
winning bidder] was unfortunate,
in that it tends to raise eyebrows
by creating the appearance of
impropriety, playing into already
heightened suspicions about the
ethics of investment banking firms.
Far better, from the standpoint
of instilling confidence, if [the
Financial Advisor] had never asked
for permission, and had taken the
position that its credibility as a
sell-side advisor was too important
in this case, and in general, for
it to simultaneously play on the
buy-side in a deal when it was the
seller’s financial advisor. In that
respect, it might have been better,
in view of [the Financial Advisor’s]
refusal to refrain, for the board of
the Company to have declined the
request, even though the request
came on May 12, 2005, almost two
months after the board had signed the
merger agreement.”
Counterpoint - “By stating this, I do
not want to be perceived as making
a bright-line statement. One can
imagine a process when a board
decides to sell an entire division or
the whole company, and when the
board obtains a commitment from its
financial advisor to provide a certain
amount of financing to any bidder,
in order to induce more bidders to
take the risk of an acquisition. These
and other scenarios might exist when
roles on both sides for the investment
banker would be wholly consistent
with the best interests of the primary
client company.”
Caution - “In general, however, it
is advisable that investment banks
representing sellers not create the
appearance that they desire buy-side
work, especially when it might be that
they are more likely to be selected by
some buyers for that lucrative role
than by others.”
Subsequently, at the 2006 Tulane
conference, Vice Chancellor Strine is
reported [in Corporate Control Alert]
to have clarified his views:
• [VC] Strine downplayed fears
that his ruling last year in a case
involving the LBO of Toys “R”
Us Inc. was meant to discourage
stapled financing…”
• “[m]any lawyers interpreted [VC
Strine’s critical comments in the
Toys decision] as a broad comment
on the practice of stapled financing
generally and discouraged
investment banks from offering
it when advising a target, or
recommended that banks not give
the target a fairness opinion when
they provide the staple.”
Fairness Opinions: When and Why Companies
Get a Second Opinion in the MA Context
Kevin Miller tries to bring clarity to the aftermath of Toys-R-Us
and Vice Chancellor Strine’s post-decision comments at Tulane
This Week
1. Kevin Miller (Alston Bird LLP) tries to bring clarity to the aftermath of Toys-R-Us and Vice
Chancellor Strine's post-decision comments at Tulane
2. Lee F. Bantle (Bantle Levy LLP) examines the tightrope act employers often have to perform when
it comes to the collision of claims of right between religious and non-religious employees
Next Week's All-Stars: M. Sean Royall (Gibson, Dunn Crutcher LLP)
1. Kevin Miller: Fairness Opinions: When and Why Companies Get a Second Opinion
in the MA Context
PLI: The Toys decision and Vice Chancellor Strine's subsequent comments have
generated a fair amount of uncertainty and confusion regarding the efficacy of second
opinions in the MA context. Can you give some background and make some sense of
the decision and those comments from a practitioner's perspective?
KEVIN MILLER: First some background. In the Toys-R-Us (Toys) decision, Vice
Chancellor Strine criticized the decision of the Toy's board to allow its financial
advisor to finance the winning bidder, creating an appearance of impropriety by
taking $10 million of fees for arranging financing for the acquirers
Point - [The Financial Advisor] did create for itself, and therefore its clients, an
unnecessary issue….The [decision of the Financial Advisor to request the Board's
consent to provide financing to the winning bidder] was unfortunate, in that it tends
to raise eyebrows by creating the appearance of impropriety, playing into already
heightened suspicions about the ethics of investment banking firms. Far better, from
the standpoint of instilling confidence, if [the Financial Advisor] had never asked for
permission, and had taken the position that its credibility as a sell-side advisor was
too important in this case, and in general, for it to simultaneously play on the buy-side
in a deal when it was the seller's financial advisor. In that respect, it might have been
better, in view of [the Financial Advisor's] refusal to refrain, for the board of the
Company to have declined the request, even though the request came on May 12,
2005, almost two months after the board had signed the merger agreement.
Counterpoint - By stating this, I do not want to be perceived as making a bright-line
statement. One can imagine a process when a board decides to sell an entire division
or the whole company, and when the board obtains a commitment from its financial
advisor to provide a certain amount of financing to any bidder, in order to induce more
By Kevin Miller
Thursday, August 10, 2006 Volume 4, Issue 30
This Week
1. Kevin Miller (Alston Bird LLP) tries to bring clarity to the aftermath of Toys-R-Us and Vice
Chancellor Strine's post-decision comments at Tulane
2. Lee F. Bantle (Bantle Levy LLP) examines the tightrope act employers often have to perform when
it comes to the collision of claims of right between religious and non-religious employees
Next Week's All-Stars: M. Sean Royall (Gibson, Dunn Crutcher LLP)
1. Kevin Miller: Fairness Opinions: When and Why Companies Get a Second Opinion
in the MA Context
PLI: The Toys decision and Vice Chancellor Strine's subsequent comments have
generated a fair amount of uncertainty and confusion regarding the efficacy of second
opinions in the MA context. Can you give some background and make some sense of
the decision and those comments from a practitioner's perspective?
KEVIN MILLER: First some background. In the Toys-R-Us (Toys) decision, Vice
Chancellor Strine criticized the decision of the Toy's board to allow its financial
advisor to finance the winning bidder, creating an appearance of impropriety by
taking $10 million of fees for arranging financing for the acquirers
Point - [The Financial Advisor] did create for itself, and therefore its clients, an
unnecessary issue….The [decision of the Financial Advisor to request the Board's
consent to provide financing to the winning bidder] was unfortunate, in that it tends
to raise eyebrows by creating the appearance of impropriety, playing into already
heightened suspicions about the ethics of investment banking firms. Far better, from
the standpoint of instilling confidence, if [the Financial Advisor] had never asked for
permission, and had taken the position that its credibility as a sell-side advisor was
too important in this case, and in general, for it to simultaneously play on the buy-side
in a deal when it was the seller's financial advisor. In that respect, it might have been
better, in view of [the Financial Advisor's] refusal to refrain, for the board of the
Company to have declined the request, even though the request came on May 12,
2005, almost two months after the board had signed the merger agreement.
Counterpoint - By stating this, I do not want to be perceived as making a bright-line
statement. One can imagine a process when a board decides to sell an entire division
or the whole company, and when the board obtains a commitment from its financial
advisor to provide a certain amount of financing to any bidder, in order to induce more

2. • such a reading “misconstrued” his
opinion. Apparently his concern
was that the seller’s board initially
refusedtoallowitsfinancialadvisor
toofferfinancingtobiddersandthen
changed its mind “for absolutely
no purpose. This was not adroit.
I could see situations where it
would be really good for a seller to
offer financing.”
• VC Strine also added that targets
didn’tbenefitfromhavingasecond
bank give a fairness opinion where
the primary adviser is offering a
staple. “running the auction is in
many ways the most important
part of the process…” Were he
a board member of a company
selling itself in an auction, he
would be of the belief that, “If [a
bank is] going to run the process,
they’re going to back it up by
giving a fairness opinion.”
• VC Strine expressed the view that
to get [a second] opinion, a target
must either pay a lot of money to
a first-tier firm or get an opinion
from a less-distinguished one,
which, the judge said “doesn’t
give me a lot of comfort. What’s
going to impress us about whether
you got a good deal is the quality
of the market check.” The second
opinion is “banker protection,”
he said, and does little to benefit
target shareholders.
In my mind, Vice Chancellor Strine’s
discussion of financing conflicts in
the Toys decision and his subsequent
comments at the Tulane conference
were intended to apply to auctions of
entire companies – that is, when the
Revlon rules apply. I don’t think his
comments at Tulane on the efficacy
of second opinions, were intended to
apply to other situations (e.g., when
the business judgment rule applies).
By their nature, auctions will, if
properly and fairly run, virtually
guarantee that the seller obtains the
highest and best price reasonably
available(i.e.satisfiestheRevlontest).
You don’t really need a first fairness
opinion, much less a second fairness
opinion (which only go to whether
the consideration to be received is fair
– not whether the board has obtained
the best price reasonably available) to
reach that conclusion so long as, and
this is the key, the auction process is
properly run.
That’s why, I think, when you look at
the Toys decision, and his subsequent
comments at the Tulane conference,
Vice Chancellor Strine is almost
entirely focused on process and
doesn’t appear to give a hoot about
fairness opinions. We’re talking
Revlonandnotthe“businessjudgment
rule” or traditional allegations that a
board breached its duty of care. In
fact, he seems to barely notice that
there was a second opinion provided
to the Toys board by Duff Phelps
– it’s given very little attention in the
Toys opinion.
When you take a closer look at the
Toys decision, two facts apparently
convincedViceChancellorStrinethat
the alleged conflicts did not infect the
auction process: (i) management was
not allowed to negotiate future roles
with bidders prior to the completion
of the auction; and (ii) Credit Suisse
First Boston, the financial advisor to
theToysboard,initiallyrecommended
that the board pursue a sale of the
Toys-R-Us business and the retention
of the Babies-R-Us business when a
sale of both businesses would have
resulted in a higher fee.
Such behavior, which was contrary
totheirself-interest,providedstrong
evidence that both management
and Credit Suisse First Boston
were acting in good faith to assist
the board in maximizing value and
that the auction process had not
been so infected as to prevent the
board from obtaining the best price
reasonably available.
In contrast, when you look at other
situations – e.g., where a company is
selling a subsidiary or a division or
engaging in a stock-for-stock merger,
situations in which the Revlon rules
do not apply – allegations that a
financial advisor was conflicted
can raise serious issues of material
fact as to whether the board was
acting reasonably in relying on the
fairness opinion of an allegedly
conflicted financial advisor. In those
circumstances, particularly in the
current environment where a board’s
actions are often examined under a
microscope, a board and its counsel
would probably be foolish not to
seriously consider obtaining a second
or independent opinion.
In many deals, particularly in large
transactions, the cost of an additional
opinionisquitesmallwhencompared
to the other costs of the transaction,
taken as a whole, and the substantial
benefits of the transaction to the
shareholders of the company. The
second opinion is likely to be given
even greater weight if the second
opinion provider is brought in earlier
rather than later in the transaction
process and has opportunities to
fully evaluate, and potentially have
an impact on, the structure and terms
of the transaction before it becomes
a “done deal.”
In summary, going back to the Toys
decision and Vice Chancellor Strine’s
comments at the Tulane conference,
there are four points I would make:

3. First, I don’t think second opinions
are worthless. Particularly in non-
Revlon cases, where plaintiffs can
raise an issue of fact as to whether
the board breached its duty of care
in relying on the fairness opinion
of an allegedly conflicted financial
advisor, I think second opinions can
be quite useful.
Second,IthinkViceChancellorStrine
appears to have unfairly disparaged
opinions provided by firms he
characterized as “less distinguished.”
Frankly, I’ve been impressed by the
quality of the opinions and analysis
provided by some of the smaller,
so-called “less distinguished” firms.
Often, their analysis reflects a more
detailed understanding and analysis
of a client’s business and its assets,
particularly if it has specialized
industry knowledge that is additive
and complimentary to the other
advice being provided to the client
and its board.
Third and somewhat perversely,
I think that putting the Toys decision
togetherwithViceChancellorStrine’s
subsequent comments at Tulane, it
appears that it may be easier for a
board to authorize stapled financing,
with its arguably inherent conflicts,
than for a board to release its
financial advisor to provide financing
even two months after the auction is
completed, as was the case in Toys,
when it’s hard to imagine that such a
remote prospect could have infected
the auction process.
On that point, my personal view
is that, despite Vice Chancellor
Strine’s comments to the effect that
apparently the Toys Board changed
its mind and agreed to release Credit
Suisse First Boston to finance the
winning bidder for absolutely no
purpose, I think there was probably
good reason for the Toys Board to
release CSFB. I think KKR was also
pressing the Toys Board to release
Credit Suisse First Boston to help
finance the purchase. Credit Suisse
First Boston had and continues to
have one of the largest and must
successful high yield financing
businesses and KKR presumably
wanted Credit Suisse First Boston
in its financing to enhance the
likelihood that the financing would
be consummated quickly and on
attractive terms. The fact that even
two months after the signing of the
merger agreement KKR was looking
for additional help with financing is
perhaps an indication that all was
not going well. Certainly, Credit
Suisse First Boston also wanted
the additional fees, but I think just
because KKR and Credit Suisse First
Boston would benefit from Credit
Suisse First Boston being released to
participate in the financing doesn’t
necessarily mean that the Toys
board acted irrationally or that the
Toys shareholders wouldn’t benefit
as well. By allowing KKR to have
CSFB involved in the financing, the
Toys Board reduced the risk that the
transaction wouldn’t close for lack
of financing, and probably allowed
the transaction to close sooner,
speeding the receipt of the merger
consideration by Toys shareholders.
If the record didn’t show that, then
it probably just goes to show the
importance of ensuring that there
is a good record to justify a board’s
actions – which is my fourth and last
and possibly most important point.
The ability to clearly demonstrate
that a board has evaluated the
benefits and risks of potential
conflicts is crucial. As you read the
key cases in this area, the biggest
issue is the occasional blindness of
people to the disadvantages or risks
associated with potential conflicts.
On the other hand, in those cases
where it’s clear that a board fully
understood and evaluated potential
conflicts and made a clear decision
that the benefits outweighed the
risks associated with that conflict, I
think courts have been reluctant to
second-guess the board’s judgment.
Reprinted with permission from PLI.