Entrepreneurs and executives, often ask when, or in the alternative, why they might need a fairness opinion on a purchase or sale transaction.
The primary reason for the Board of Directors of a selling company to seek a fairness opinion is to establish, primarily for the benefit of minority shareholders who lack board representation or whose votes won't count (because of their relatively low shareholdings), that the transaction as contemplated is fair to all shareholders.
The Board is, as you might imagine, seeking to insulate itself from claims of those who may disagree with the decision. There are a variety of legal maneuvers employed to manage this risk, including the use of an auction procedure to demonstrate that the highest or at least best bid has been received, reviewed, negotiated and ultimately accepted. Good counsel will usually recommend a "belt and suspenders" approach, utilizing multiple means of protecting the board from rancorous shareholders.
The primary determining factor as to what makes a fair transaction is the valuation. Deal terms, more broadly, also contribute to determination of fairness. If the valuation were high, for instance, but the consideration is largely contingent, seller financed or otherwise uncertain, it wouldn't be as clear that the transaction is fair to the selling shareholders.
For buyers of firms, a fairness opinion is less common. The occasion for obtaining one is less common and deals with managing the risks of buying a company that may have been on the verge of bankruptcy, especially if the sale may allow the seller to avoid bankruptcy and yet won't allow the seller to pay all of its creditors. Some unsecured creditors may be forced to accept a discounted payment in settlement but may be willing to do so to accelerate the payment and avoid the risks of bankruptcy. A fairness opinion helps reduce the risk of the courts vitiating or cancelling the purchase and putting the company into the protection of bankruptcy.
A wide range of firms can provide a fairness opinion. Large, bulge bracket investment banking firms provide them to their clients for fees that can reach into the millions of dollars on the largest transactions. The Final Four or Big Four audit firms also provide fairness opinions, often at lower fees. Smaller, boutique investment banking firms (like my firm, Thorpe Capital Group, and Houlihan Lokey) also offer fairness opinions, typically at fees more appropriate for significant, middle market transactions.
Comment Preview