A fairness opinion indicates whether financial elements in a transaction are fair to specific constituents. Mergers and acquisitions (M&A), recapitalizations, and related party transactions often involve fairness opinions. While not required by law, fairness opinions are commonly used to assist the target company's Board of Directors, a special committee of the Board, or other fiduciaries in assessing the fairness of the financial terms of a transaction. A fairness opinion helps to provide boards with a “safe haven” in which transactions are generally viewed under the more forgiving legal standard of the business judgment rule. In short, a fairness opinion helps insulate fiduciaries from claims of breach of duty.
In addition to being useful in the event of litigation, fairness opinions can also minimize the risks of disagreement and litigation in the first place. A fairness opinion both provides the Board a “bullet in the chamber” to dissuade legal action and helps clear up misunderstandings about a deal in advance. While fairness is usually a concern from the seller's perspective, a fairness opinion from another financial advisor is sometimes obtained on behalf of the acquiror in cases where the transaction is considered “material” (i.e. financially onerous or dilutive) for the acquiring company.
In Smith v. Van Gorkom, the court ruled against the board of directors of TransUnion Corporation, who voted for a leveraged buyout, based in part on the absence of a fairness opinion from an independent financial advisor. Is an investment bank an independent financial advisor? No. If the bank is advising the target company or buyer for a fee that is contingent on the successful completion of the deal, that represents a clear conflict of interest. If the bank offers the fairness opinion “for free”, that creates an even greater conflict of interest. So where should you go to obtain a fairness opinion? In answering that question, we must consider that another concern regarding fairness opinions is the lack of consistency in the practices and procedures used to assess and demonstrate the financial fairness of a transaction. Fairness opinions involve a review of the transaction’s financial structure, the type and timing of the deal, and the financial and tax consequences of the transaction. The essence of the opinion is valuation.
Mercovus authors fairness opinions backed by our deep valuation experience and expertise with established valuation methodologies. We have also played a part in several investments and sales from other perspectives (negotiation, accounting, tax planning) and are able to evaluate transactions holistically.
Fairness opinions have been subject to increased litigation and scrutiny by the courts in recent years due in part to heightened concerns about transparency and objectivity in the wake of the financial crisis. A total of 112 M&A deals valued over $100 million had associated lawsuits in 2017. The need for a fairness opinion is especially salient in the following situations:
Multiple offers have been made and they differ in structure, thereby leaving open to interpretation which offer is “best”;
The return to shareholders varies in each offer;
Certain minority shareholders will not receive any financial return as a result of the transaction;
Insiders or other affiliated parties are involved in the transaction;
There is lack of agreement among the directors as to the adequacy of the offer;
The company has poor recent financial performance;
The offer is hostile or unsolicited;
There is only one bid for the company and competing bids have not been solicited.
Fairness opinions are typically obtained at the end of the transaction process, usually when the deal closing is pending. That puts additional pressure on the parties managing the transaction to choose a fairness opinion provider who can execute under intense deadline pressure without immoderately driving up costs.
If you think you might need a fairness opinion, and you need a firm that is agile, responsive, and qualified, contact Mercovus at firstname.lastname@example.org: We’re happy to help.