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Recently we briefly answered several common questions market participants have about fairness opinions, but the most important question—Why get one?—warrants a more fulsome treatment.
After all, getting a fairness opinion costs time and money and–with the exception of California, where the California Corporations Code 1203 does require that many transactions, including certain tender offers, reorganizations, and asset sales undergo a fairness opinion if they involve an interested party—there is no legal or regulatory requirement to get one.
There’s also no legal requirement to carry fire insurance once your house is paid off, but prudent people do.
Litigation is an unfortunate fact of life in today’s dealmaking world, and it’s only getting worse. According to a report from Cornerstone Research, there were precisely 100 M&A-related class action lawsuits filed in U.S. federal and state courts in 2020. That figure is down somewhat from 2019 when there were 160 such lawsuits, but the slight downturn is likely more related to a slowdown in deals during the pandemic than decreased litigiousness on the part of shareholders. Even the 100 suits in 2020 were still well above the average for 1997-2019 of just 34.
Allegations of mispricing a deal are one of the most common shareholder complaints. As the editor of the Mergers & Inquisitions blog put it: “Even if the company is worth $100 million and it gets sold for $1 billion, some random shareholder with too much time on his hands will argue that it should have been sold for $10 billion and will start a class-action lawsuit.” Indeed, it was just such a case, the Delaware Supreme Court’s landmark 1985 ruling in the Smith v. Van Gorkom, that made fairness opinions commonplace in any large deal involving a public entity.
To be sure, fairness opinions aren’t a magic bullet that will prevent such suits from ever being filed, but in the event a case is brought, they can be introduced as evidence that directors or other interested parties that commissioned them did their homework.
To the extent that arming oneself for potential litigation is an important reason to obtain a fairness opinion, it is worth briefly revisiting the question of who should provide it; is it an investment bank advising on the deal that stands to reap significant fees if it goes through or a truly independent third party? Directors should pause and consider which they would be more confident presenting to a skeptical jury or hard-nosed judge, a report from a bank with an interest in the outcome of the deal or one by a party with no skin in the game?
The Ancillary Benefits
In addition to providing a measure of legal air cover, fairness opinions can be useful to fiduciaries in their decision-making process. They will not tell the board or other shareholders whether they should go through with the deal, and they don’t constitute legal, regulatory, or tax advice. But fairness opinions do opine on whether the financial terms of the transaction are fair to a particular interested party, and they surface a great deal of information that fiduciaries may find useful in evaluating the overall merits of the deal.
Prudence dictates commissioning a fairness opinion in connection with virtually any M&A transaction involving a public company, but the legal and ancillary benefits suggest fiduciaries should consider them for any transactions—management buyouts, recapitalizations, bankruptcies, and related party transfers—where their judgment may be second-guessed.
More Perspectives: Fairness Opinions
Top 7 Questions About Fairness Opinions
VRC’s Opinion Practice Group experts answer the top questions asked about fairness opinions for financial transactions.
3 Reasons Your Organization Needs A Fairness Opinion
If your organization is facing a merger, acquisition, or takeover, the time is now to seek out the services of an independent, third-party opinion provider.
Deal Lawyers Discusses Fairness Opinions with VRC
The subscriber-only publication Deal Lawyers took time to talk with Managing Director Chad Rucker, to examine the conflicts that exist in typical M&A assignments where a board may hire an investment bank to provide advisory services.
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