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Fairness opinions for financial transactions are sometimes optional but almost always a good idea. Following are some questions we see come up repeatedly:

1. What is a fairness opinion?

A fairness opinion is an assessment of the financial details of an M&A transaction, takeover, spinoff, or other type of business deal, evaluating whether the proposed consideration being paid is fair from a financial point of view to a particular party. Usually, they are accompanied by a supporting report detailing the information utilized and the financial analysis behind the opinion. Importantly, fairness opinions on their own don’t constitute a recommendation whether to proceed with a transaction because they don’t address the legal, regulatory, accounting, insurance, tax, or other merits.

2. When did they become commonplace?

Fairness opinions became much more common after 1985 when the Delaware Supreme Court ruled in Smith v. Van Gorkom that the directors of TransUnion breached their duty of care by agreeing to sell the company without getting advice on whether the price was reasonable. Today, many directors insist on a fairness opinion for significant transactions to reduce similar legal liability.

3. What kind of deals get fairness evaluations?

Fairness opinions are most commonly completed for public companies, but private companies get them too. They are most commonly undertaken in connection with the purchase or sale of a company but may be advisable for other types of transactions:

• • Management buyouts
  • Recapitalizations
  • Bankruptcy, liquidation, or restructurings
  • Creation of Employee Stock Ownership Plans (ESOPs)
  • Related party transfers

4. Who provides a fairness opinion?

Ideally, an independent firm specializing in valuation is best suited to deliver a transaction opinion. They are, however, also provided by an investment bank.

5. Is there a difference in a report delivered by an investment bank vs. an independent valuator?

Boards of directors often engage investment banking professionals to provide fairness opinions. They may already be familiar with the entity being valued. However, if the opinion provider is involved in the transaction, there is a potential for conflict of interest on both an economic and behavioral dimension:

• • Economic. The M&A success fee is usually much higher than the payment for the fairness evaluation, so a bank may be incentivized to opine that the deal is fair.
  • Behavioral. Acquisitions tend to have inertia whereby everyone involved—including the bankers and the management teams—is driving to a successful outcome (defined by closing the deal). As such, an investment bank’s judgment may be clouded when providing a fairness opinion.

To overcome conflicts, boards should strongly consider an independent fairness opinion provider that is paid a fixed fee for delivering an opinion, regardless of the transaction’s success.

6. Besides avoiding providers with a vested interest in the transaction’s completion, are there other best practices to protect the process’s integrity?

Boards should designate one or more independent directors to whom the fairness opinion provider reports. Before the fairness opinion engagement letter is signed, a level-setting meeting without the management team present is also a good idea. At such a meeting, it should be reiterated that the fairness opinion provider works for the board and no one else, including management, and that the board should be informed immediately when and if problems with the transaction occur or doubts arise.

7. How does one evaluate the quality of a fairness opinion?

Once the report is delivered, there are many indicators of a fairness opinion’s methodological rigor and thoroughness:

• • Experienced valuation professionals usually independently apply two or more approaches to valuing an asset; take a close look at whether they came to a similar value conclusion and any methodology where the acquisition price was outside that methodology’s valuation range.
  • Since other companies and transactions are often treated as inputs in the analysis, consider which specific ones were selected and whether they truly are comparable.
  • Similarly, consider the reliability of projections used in the analysis and whether they are consistent with existing management models.

Fairness opinions can be a board’s best friend in the event stakeholders challenge the terms of a transaction, but diligent directors will make sure they asked the right questions upfront.

If you need help understanding if a fairness opinion is suitable for your situation, VRC can help. We’ve issued over 1,000 fairness, solvency, and capital adequacy opinions for transactions ranging from $10 million to $10 billion in market capitalization. We invite you to review a representative compilation of our recent opinion engagements. Then, contact us to start working with us today.