Fairness Opinions
High-risk transactions are likely to be heavily scrutinized by various stakeholders with diverse interests and rights. A fairness opinion can help the board (or a special committee of the board) determine whether a proposed transaction is fair to relevant stakeholders.
A fairness opinion is a report that evaluates the facts of a merger, acquisition, carve out, spin-off, buyback or another type of purchase and provides an opinion as to whether the proposed stock price is fair to the selling or target company. Fairness opinions are provided to the key decision makers in the target/selling company and are written by qualified analysts or advisors, usually of an investment bank. The analysts examine the specifics of the deal, including any possible business synergies that benefit the target/seller if applicable, the terms of the agreement, and the price offered for the stock of the target/seller. Fairness opinions are not always required in transactions involving public companies but can be helpful in reducing the risk associated with a merger, acquisition, carve out, spin-off, buyback, or another type of purchase, including the risk of litigation. Private transactions may require a fairness opinion.
Importance of a Fairness Opinion
The directors of a company have a fiduciary responsibility to shareholders, which is known as the business judgment rule. The rule requires that the management must represent the shareholders in good faith, like an ordinary person who is responsible for supervising the affairs of the business. Since shareholders do not take part in the day-to-day running of the business, the directors are responsible for overseeing the affairs of the company. The fairness opinion aims to demonstrate to the shareholders that the management or directors acted in the shareholders’ best interest and that a report by independent advisors hired by the company confirms that the terms were fair. In the absence of a fairness opinion, there may be a section of shareholders who are dissatisfied with the value agreed upon by the seller and the buyer.
Also, in a buy and sell transaction, some shareholders may raise queries if they are not satisfied with the terms of the deal. Some shareholders may seek information as to whether there were other alternatives to the deal, where the transaction could’ve achieved better terms. An opinion prepared by a qualified advisor can help solve such disagreements by affirming that the pricing given was a fair valuation. In a situation where dissatisfied shareholders file a lawsuit against the company, the directors of the company can use the fair opinion report to show that they acted in good faith during the transaction.