The Importance of Fairness Opinions in Transaction


The final aspect of many merger/sale transactions is the fairness opinion. A fairness opinion is provided by an independent financial advisor to the board of directors of selling companies in many transactions today, especially those with a significant number of minority shareholders. In cases where the transaction is considered to be "material" for the acquiring company, a fairness opinion from another financial advisor is sometimes retained on its behalf.A fairness opinion involves a total review of a transaction from a financial point of view. The financial advisor must look at pricing, terms and consideration received in the context of the market for similar companies. The advisor then opines that the transaction is fair, from a financial point of view and from the perspective of minority shareholders.

Why is a fairness opinion important? While there are no specific guidelines as to when to obtain a fairness opinion, it is important to recognize that the board of directors is endeavoring to demonstrate that it is acting in the best interest of all the shareholders by seeking outside assurance that its actions are prudent.The facts of any particular transaction can lead reasonable (or unreasonable) people to conclude that a number of perhaps preferable alternatives are present. A fairness opinion from a qualified financial advisor can minimize the risks of disagreement among shareholders and misunderstandings about a deal, as well as litigation than can kill transactions. Although the following is not a complete list, consideration should be given to obtaining a fairness opinion if one or more of these situations are present:

1. Competing bids have been received that are different in price or structure, thereby leading to an interpretation as to the exact terms being offered, and which offer is "best."

2. Insiders or other affiliated parties are involved in the transaction.

3. The company has experienced a recent history of poor financial performance.

4. The offer is hostile or unsolicited.

5. There is lack of agreement among the directors as to the adequacy of the offer.

6. There is concern that the shareholders fully understand that considerable efforts were expended to assure fairness to all parties.

7. The board desires additional information about the investment characteristics of the acquiring company.

8. Varying offers are made to different classes of shareholders.

9. There is only one bid for the company, and competing bids have not been solicited.

10. There is a significant transaction between a significant insider and the company.