Within the M&A domain, a fairness opinion refers to a document submitted to the seller’s board of directors by the seller’s investment banker, which certifies the transaction’s financial fairness. The fairness opinion is meant to give selling shareholders an unbiased, outside assessment of the agreement’s fairness. Read on to understand the fairness opinions in detail:

Understanding Opinions about Fairness:

The parties to a merger, acquisition, or takeover receive advice from a fair opinion based on professionals’ knowledge. This could include the acquiring corporation, its consultants, or the stockholders of the business being bought. It is an expert judgment backed up by facts gathered or by experience gained from the market.

In exchange for a fee, these important decision-makers receive fairness opinions prepared by certified analysts or consultants, typically from an investment bank. When analyzing a deal, analysts look at the details, such as the terms of the agreement, the price provided for the target’s or seller’s stock, and any potential business synergies that could benefit both parties.

Fairness opinions are not always necessary in transactions involving public companies. Still, they can be useful in lowering the risk involved in significant financial acts or purchases, including the possibility of litigation. They can also be an effective means of promoting communication among the parties involved, even though they are unnecessary.

Fairness opinions are highly good if the following points happen:

  • When a hostile takeover is the reason for the transaction
  • When there are several offers for the company at varying prices when company insiders are involved
  • Getting fairness opinions is a particularly smart move when board members or shareholders have doubts about the transaction’s fairness.

Fairness Opinions and Their Significance:

The business judgment rule imposes a fiduciary duty on a company’s directors toward its shareholders. The regulation mandates that management acts in good faith on behalf of the shareholders. They function as reasonable persons in charge of overseeing the company’s operations.

The directors manage the company’s operations as shareholders are not involved in day-to-day operations. The fairness opinion is like a report that shows shareholders that the company’s leaders did what was best for them. It’s done by independent advisors hired by the company to confirm whether the deal was fair, especially if it’s being turned down.

With a fairness assessment, some shareholders might agree with the value the seller and the purchaser agreed upon.

Certain shareholders might inquire about other possible options for the transaction, ways to improve the conditions of the purchase, etc.

By confirming that the price represents a fair evaluation, an opinion written by a trained advisor can ease such worries. Directors can use the fair opinion report to demonstrate that they acted in good faith throughout the transaction if unhappy shareholders challenge the company.

Key Elements of a Fairness Opinion to Take Into Account

Conducting due diligence:

Independent advisers are required to perform due diligence before forming a fairness opinion to ensure that all the data needed to make a determination have been gathered.

They accomplish this by going to the selling company’s place of business and reviewing the paperwork, enabling them to assess the company’s worth.

In addition to historical financial performance, factors affecting revenues, the company’s dividend-paying history and capabilities, and considerations for similar deals should all be examined. It is also recommended that the advisers go over the details of the merger or acquisition agreement.

Extending due diligence:

The due diligence should not only concern the selling corporation. The advisors ought to carry out a similar exercise with respect to the purchasing corporation. If the buyer is a publicly traded company, the advisors ought to examine its financial statements, previous mergers and acquisitions, and any recently released public disclosure materials.

The advisors must also initiate contact with other advisers who have worked with the company to obtain any relevant information that might be important to the deal.

The directors get the advisers’ report for evaluation and consideration after finishing their review and writing a report on their views. A fairness memorandum provides an overview of the management talks for each issue listed in the fairness report. In addition to participating in these conversations, the advisers are available to address any queries or worries the management may have about their report.

Wrapping It Up:

Fairness opinions are essential for promoting transparency and confidence in mergers and acquisitions, along with thorough due diligence. They comfort stakeholders and assist in reducing any conflicts or misunderstandings with an unbiased evaluation of a transaction’s financial fairness. Fairness opinions show a commitment to honesty in corporate governance and help to tackle the obstacles in some great ways.

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