A fairness opinion is a professional opinion by an independent financial intermediary as to whether the terms of an acquisition are fair to the shareholders. Typically, such fairness opinions will be obtained by a company’s board of directors, whose goal is to perform their fiduciary duty to the shareholders.
Hypothetical scenarios that require an expert in business valuation:
A large manufacturing company is looking to acquire a steel producer. The steel producer’s board of directors wants to know if the $45 million offer is fair. Consequently, the steel producer needs to hire an independent financial intermediary to provide a fairness opinion in regards to the terms of the purchase agreement.
A public, medium-sized technology company feels burdened by the regulatory compliance it must deal with and wants to go private. To take itself private the company has determined a value that it believes will be fair to its shareholders. In order to make sure the value is fair, the board of directors hires an independent business appraiser to issue a fairness opinion regarding the transaction.
Special considerations for fairness opinions:
A fairness opinion is not a valuation analysis of a target company, an opinion regarding the legal fairness of a transaction, or a recommendation to the board of directors regarding how they should vote on the proposed transaction. A fairness opinion only provides analysis of the proposed transaction and if it is fair to the company’s shareholders.
Special consideration should be given to the scope and limitations of the fairness opinion. What the fairness opinion covers is a critical issue that should be addressed when starting a fairness opinion. It is important to determine that the scope of the fairness opinion covers the appropriate terms and conditions of the proposed transaction. Also, fairness opinions are subject to limiting conditions which can greatly impact the interpretation of the fairness opinion. Limiting conditions could include if financial information was independently verified, constraints on management interviews and availability of data, among others.
Just like in a business valuation, it is imperative for the business appraiser to provide an in-depth analysis on the methodologies used to develop the fairness opinion. The terms and structure of the particular transaction, within the scope of the fairness opinion, must be thoroughly examined in order to determine the appropriate and applicable methodologies.
