A Fairness Opinion is an independent qualified third-party financial expert’s statement as to the “fairness”, from a financial point of view of a specified financial transaction, based on professional judgment supported by collected data. The “fairness” is from the standpoint of a certain designated party or parties (the company or majority shareholders), usually vis-à-vis minority shareholders.

Fairness opinions are established on the basis of a valuation report and require an in-depth analysis of the companies involved and the terms and conditions of the transaction. Fairness opinions are used to support decision making by corporate leadership and to assist shareholders or affected parties in evaluating the terms of such a proposal.

In rendering a fairness opinion, the author evaluates:

  • The value of the business or assets transferred or exchanged.
  • The value and form of consideration received or paid.
  • Available alternatives offering greater value than the proposed transaction, determined by different approaches, including a testing of the market.

Fairness Opinions are prepared for:

  • Affiliate transactions
  • Corporate mergers & acquisitions
  • Sales and divestitures
  • Refinancing an acquisition,
  • Complex transactions or situations involving potential conflicts of interest.
  • Leveraged buyouts
  • Recapitalizations and restructurings
  • Employee Stock Ownership Plan (ESOPs) transactions (for the Trustees of an ESOP) to provide needed assurances that the ESOP is not paying more than fair market value for the stock it is acquiring, and that the transaction is fair from a financial point of view.
  • Exchange offers/minority buy-outs
  • Transactions involving “insiders” and related parties
  • Court appointed valuations in hostile takeovers
  • Liquidations
  • Bankruptcy reorganizations
  • Dissenting Shareholder disputes

Components of a Fairness Opinion engagement:

  • Interviews with key management
  • Interviews of the company’s professional advisors
  • A visit to major facilities of the company
  • Review and analysis of historical financial statements
  • Review of industry information and current outlook
  • Review of current economic conditions in markets served by the company
  • Thorough analysis of underlying assumptions used in management’s projections
  • Review of comparable public companies
  • Review of reported transactions in the company’s industry
  • Review of transaction documents
  • Analysis of acquiring entity’s ability to perform (Payback)
  • Review and confirmation of financing source(s)
  • Confirm environmental issues have been addressed
  • Confirm that accounting and tax considerations have been addressed
  • Evidence of errors & omissions coverage held by the firm performing the opinion
  • Other issues that may be unique to the transaction

Fairness Opinions are prepared to:

  • Help fiduciaries make decisions affecting the financial interests of others, and protect them in the event a transaction is challenged.
  • Help with issues vis-à-vis boards of directors, independent committees, stockholders, lenders, regulators, courts and the IRS.

A Solvency Opinion is a financial opinion usually issued for lenders before committing a loan to close a transaction to address certain financial tests of solvency. These opinions are available for boards as additional protection in the case of a subsequent “fraudulent conveyance” or a “fraudulent transfer of assets” attack.

Other types of Capital Adequacy Opinions include:

  • Surplus opinions
  • Reasonably equivalent value opinions
  • Insolvency opinions
  • Viability opinions