What is a Fairness Opinion
A fairness opinion is essentially a valuation analysis provided by a financial advisor that assesses whether a particular transaction is fair to all shareholders or a specified constituency. However, a fairness opinion goes beyond a typical valuation analysis. The value of what is being given up and the value of what is being obtained in exchange is thoroughly examined in a fairness opinion.
In a merger, this will typically involve determining the value of the merged entity. In a stock issuance, this will typically involve an assessment of the purposes to which the capital is to be used and the impact on the value of the company going forward.
While fairness opinions evaluate whether a transaction is fair, they do not opine on whether the price is the best price.
Purpose of a Fairness Opinion
- Documents the results of the valuation process and the financial issues that were taken into consideration.
- Provides the board of directors with written assurances that the value arrived at is fair from a financial point of view.
- Provides tangible evidence that can be used in litigation to demonstrate that the board of directors acted reasonably and on a fully informed basis.
When is a Fairness Opinion Needed
Fairness opinions are typically obtained in extraordinary transactions. Fairness opinions are especially relevant where a company has a controlling shareholder or where one or more members of the board of directors or management have an interest in the transaction that may conflict with the interests of the company’s shareholders. Examples of extraordinary transactions where fairness opinions are often sought are:
- Mergers, Acquisitions, Divestitures and Change of Control transactions including SPAC/de-SPAC
- Unsolicited Tender Offers and Hostile Takeovers
- Going Private
- Private Placements (especially in situations that may result in dilution to existing shareholders)
- Corporate Restructurings
- Sale of a division, subsidiary, or brand
