A fairness opinion provides a comprehensive opinion that fulfills a critical role in supporting the financial fairness of a merger, acquisition or other related corporate transaction. Typically provided by a third-party expert, boards of directors will seek a fairness opinion as part of discharging their fiduciary duties of loyalty and care by acting on an informed basis. Fairness opinions may also be provided in connection with corporate transactions in which credit agreements or bond indentures place restrictions on transactions involving related parties.
VRC has prepared fairness opinions for boards of directors, corporate legal advisors, private equity firms, institutional investors, fiduciaries, buyers and sellers, private company business owners, limited partners and trustees.
Transactions That Trigger a Need for Fairness Opinions
Typical transactions triggering the need for a fairness opinion include:
- Synergistic mergers or acquisitions; Divestitures
- Tender offers including leveraged buyout (LBO), management buyout (MBO), or other going private transactions
- Large block stock purchases; Private placements; Down-round financings
- Related party transactions; Transactions with competing offers; Transactions restricted by a bond indenture
- Dividend recapitalizations; Reorganizations; Hostile takeovers
When a transaction involves related parties, such as a director or company, a fairness opinion may be needed to demonstrate that the transaction is completed on terms that are similar to arm’s length transactions. In addition, some bond indentures may require a fairness opinion for certain types of transactions.
Benefits of Fairness Opinions in Deal Making
As part of a fairness opinion, an analysis of a proposed acquisition target may provide board members with context and may highlight potential implications that others, such as those who may be incentivized to execute the deal, may overlook.
Beyond a general legal consulting arrangement, an independent fairness opinion can potentially provide added tangible protection to fiduciaries.
A fairness opinion can help demonstrate to shareholders and external stakeholders that board members are exercising prudence and care when contemplating a transaction.
Fairness Opinion Process
Preparing a fairness opinion involves both a qualitative and quantitative analysis. The qualitative analysis focuses on reviewing the facts and circumstances surrounding the prospective transaction. Conducting a fairness opinion requires interviewing the company’s management and legal advisors, reviewing certain legal documents, analyzing historical financial statements and reviewing business strategies and financial projections.
The quantitative analysis may include the following approaches:
- Publicly traded market comparable analysis
- Precedent transaction analysis
- Discounted cash flow (DCF) analysis
- Leveraged buyout (LBO) analysis
- Break-up analysis
- Review of historical stock price trading history
- Study of premiums paid for similar companies
When To Seek a Fairness Opinion
Obtaining a fairness opinion early in the deal process is always advisable, but it becomes an important element in assisting boards of directors to fulfill their fiduciary duties.
Deal-related concerns may not reveal themselves early in the deal-making process; companies then find themselves with time and budget constraints to seek an opinion provider and, as a result, solicit an opinion from the investment bank leading the deal. Scrutiny has increased regarding bankers issuing fairness opinions on a transaction in which they also receive a significant contingent fee, and in some instances, provide financing to the potential buyers. Shareholders may perceive this as a conflict of interest and if the opinion is challenged it may not hold up in court.
Why Work With VRC?
VRC’s fairness opinions offer judgment beyond modeling – meaning that we develop an objective analysis that assists boards in fulfilling their fiduciary duties.
As one of the first providers of opinions since the 1980’s, VRC has issued over 1,000 fairness, solvency and capital adequacy opinions for transactions ranging in value from $10 million to $10 billion in market capitalization.