Engaging an independent party to perform a Fairness Analysis and provide a Fairness Opinion provides comfort that a disinterested party has performed its own analysis and confirms that the terms negotiated by the fiduciaries, and their transaction advisors, is fair to the parties they represent.
Fiduciaries must be able to thoroughly defend and justify their decisions to shareholders and other stakeholders – especially in the context of sensitive or extraordinary transactions such as mergers, acquisitions, divestitures, reorganizations, transactions with insiders, and private placements. Sound independent financial advice can help insulate directors and officers from legal challenges and liability.
Private and public companies are referred to Marshall & Stevens by outside legal counsel and other trusted advisors to provide independent Fairness Opinions for their important transactions.
If there is a concern that even one shareholder may challenge the controlling shareholder(s), management, board of directors, or board of managers – claiming that the transaction being pursued results in unfair treatment to minority shareholders, then a Fairness Opinion should strongly be considered to protect the decision makers.
Fairness Opinions are especially relevant where a controlling shareholder or when one or more of the decision makers have an interest in the transaction that may conflict with the interests of the Company’s shareholders – whether that conflict is perceived or actual. Fairness advice from an independent financial advisor can assure a board and its’ stakeholders that the decisions made by the board are fair and reasonable.
These opinions are becoming a current topic of discussion with the recent rise in popularity of Special Purpose Acquisition Companies (SPACs). Litigation activity has been also increasing against SPAC Boards if, for example, the noncontrolling shareholders perceive that the SPAC Boards are looking out for their own interests with a rushed transaction at the end of the SPAC term.
Purpose of an Independent Fairness Opinion:
- Documents the results of the valuation process and the financial issues that were taken into consideration.
- Provides the board of directors or board of managers with a written opinion that the value arrived at is fair from a financial point of view.
- Does not opine that the transaction is the best deal available, only that the subject transaction 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.
For a more detailed overview of Fairness Opinions, see our Fairness Opinion Guide.
Examples of circumstances that have led to our being engaged to provide a Fairness Opinion:
- A well-performing private company was approached by multiple directors to redeem their shares. The controlling shareholder agreed to have the company repurchase shares but had to extend the repurchase offer to all shareholders. The company pursued a debt refinancing to assist with the repurchase. Outside counsel recommended a Fairness Opinion and a Solvency Opinion.
- An acquisitive private company needed an infusion of capital to stay in business during an unexpected downturn. A director offered to purchase equity at a much lower value than the value used to make the last three acquisitions. The resulting dilution and value concerns led outside counsel to recommend a Fairness Opinion.
- A middle market private company negotiated a sale of one of its divisions to a Fortune 100 company. The purchase agreement included a provision that multi-million-dollar retention bonuses be paid to specific executives who were also shareholders. A few minority shareholders wanted the retention bonuses contributed to the purchase consideration to increase the purchase price for all selling shareholders. The buyer rejected the redirection of funds. Outside counsel for the seller recommended a Fairness Opinion.
- A public company purchased a minority interest in another public company a year prior to offering to purchase the remaining interest. The buyer offered stock plus cash as consideration at the same exchange terms as 12 months prior. Outside counsel recommended a Fairness Opinion to the seller.
- Two public companies each held a 50/50 stake in an intellectual property company (“IP Co.”). One entity offered to buy out the other’s interest in the IP Co. Outside counsel for the seller recommended a Fairness Opinion.
- Debt holders foreclosed on equity holders of a distressed company. Equity holders were offered $0.01 each for their shares. Outside counsel for the debt holders recommended they obtain a Fairness Opinion.
- A private real estate investment company with ownership in a large portfolio of commercial property through multiple funds and a management entity wanted to pursue an UpREIT transaction prior to IPO. Outside counsel recommended a Fairness Opinion which included the valuation of every underlying property, the management entity, and a relative value analysis.
For ESOP transactions, a Letter of Adequate Consideration is oftentimes requested rather than a Fairness Opinion. The two are similar in that the goal is to provide the transaction fiduciary(ies) with financial guidance from a qualified firm. For more information on ESOP transactions, see our ESOP page.
Marshall & Stevens has been in the valuation business for more than 85 years and has substantial expertise in rendering Fairness Opinions in a wide variety of matters. Employing a high degree of thoroughness and diligence, our professionals bring a wealth of experience from backgrounds in valuation, law, investment banking, and accounting.