FAQs About Fairness Opinions

Mergers and acquisitions activity surged in the United States in the first half of 2021. The surge is driven by a boom in the stock market; historically low borrowing costs; and excess capital built up by companies, private equity funds, and special purpose acquisition companies (SPACs) during the COVID-19 pandemic.

However, uncertainty about taxes, regulations, inflation, and geopolitical risks abounds in today’s marketplace. A fairness opinion can protect against costly litigation if a deal’s projected results unexpectedly fall short or insolvency becomes likely. Here are answers to potential questions clients may have about these expert opinions.

What is a Fairness Opinion?

Simply put, a fairness opinion addresses whether a transaction appears “fair” from a financial point of view. Fairness opinions help confirm that dealmakers fulfilled their fiduciary duty to act in the best interests of the company and its shareholders. However, fairness opinions don’t address legal or structural fairness, nor do they constitute an endorsement or a guarantee of a particular transaction.

When preparing a fairness opinion, a financial expert usually estimates a range of values regarding a proposed transaction. Theoretically, the ceiling of this range represents the highest price a prudent buyer would be willing to pay; the floor is the lowest price a prudent seller would accept. The analysis typically presumes that neither party has been forced to buy or sell, and that both parties have reasonable access to relevant financial data.

Another proxy for the lower end of a fairness range is the amount that dissenting shareholders could reasonably expect to obtain in a statutory appraisal action. Legal counsel can help the fairness opinion provider define the appropriate standard of value.

How do Market Conditions Factor into the Opinion?

A fairness opinion is valid only on a particular date. A transaction may be fair one day but unfair the next because of changing market conditions or product obsolescence, for example.

Generally, fairness opinions are performed as close to the transaction or proxy date as possible. Opinions dated too early or not updated for changing conditions may not withstand scrutiny — especially in volatile markets.

When are Fairness Opinions Appropriate?

Most people associate fairness opinions with public companies undergoing high-profile management buyouts, hostile takeovers, or going-private transactions. But fairness opinions have become increasingly popular among private businesses with complex deal structures, related-party transactions, and vocal shareholders that don’t own a controlling interest in the company.

Fairness opinions aren’t legally mandated, but they can help facilitate major transactions, such as mergers, spin-offs, stock repurchases, and divestitures. Businesses that reorganize out of court or under Chapter 11 of the U.S. Bankruptcy Code may choose to obtain fairness opinions on behalf of creditors and other stakeholders.

In addition, buyers and sellers use fairness opinions to support their strategic decisions and to defend against lawsuits. And some loan covenants require fairness opinions to protect the bank’s financial interests against fraudulent conveyances.

Who Can Help?

Courts generally perceive fairness opinions as lacking objectivity if they’re prepared by company insiders, business brokers, and other people who helped negotiate the deal. Instead, independent third parties — such as a credentialed business valuation professional — are usually hired to avoid potential conflicts of interest and withstand scrutiny if shareholders later challenge a deal.