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What Is A Fairness Opinion & When Should You Get One?

When you’re looking at a large transaction, you want only the best for your business. So collecting the right information is key to making a wise and well-informed decision. Obtaining a fairness opinion is a great way to know if the proposed transaction is fair to you, so you can make that choice with confidence.

If you’re wondering what that is, we’ll explore everything you need to know about fairness opinions, when they’re helpful, and common questions about them.

The Basics: What Is A Fairness Opinion?

A fairness opinion is a compilation of findings that ultimately provides your business with an idea of how equitable a proposed transaction is from a financial point of view. A professional opinion will lay out if the price that’s set in a large deal, merger, or acquisition is ultimately fair.

To determine that, it looks at pricing, terms, and other considerations that were received from similar companies in the same market. Additionally, it looks at if the deal is fair both from a financial perspective and the perspective of shareholders.

The reason companies will seek a fairness opinion is that it can help protect both shareholders and the management team. Sometimes when considering a transaction the interests of both parties aren’t in alignment.

For example, a decision management can make might favor their interest, but isn’t as favorable for shareholders. Taking the steps to obtain an opinion protects both parties from that example scenario and reduces the risk of shareholder lawsuits disrupting the deal.

When Is It Best to Get A Fairness Opinion?

If you’re entertaining a large transaction that possibly affects shareholder value, it’s wise to get one. That includes scenarios like:

• You have competing bids varying in price and structure. (These could lead to that disagreement in the perspective of shareholders vs. management.)
• You have an unsolicited offer or are undergoing a hostile takeover.
• You’re reviewing an offer that includes insiders or other affiliates that can lead to a possible (or even perceived) conflict of interest.
• You want to take precautions to ensure your shareholders see all effort is being made to ensure the proposed deal is fair for all. (This shows the management is trying to operate to their benefit.)

A fairness opinion is an effective due diligence step to ensure that good intentions are translating into responsible decisions. It’s an important part of fiduciary duty to ensure large decisions like an M&A are based on informed decision-making and that your leadership isn’t showing gross negligence.

Why does it matter? The ruling of Smith v. Van Gorkom in the 1980s is a good example. The leadership approved a merger without obtaining proper information. Ultimately the Delaware Supreme Court held the leadership, not shareholders, responsible for gross negligence.

A Fairness Opinion Example

Let’s walk through a hypothetical scenario to better understand how a fairness opinion comes into play. Say that Company X has made an offer to purchase Company Z.

As part of doing due diligence, the leadership board of Company Z decides to work with an objective advisory firm independent of the deal to obtain a fairness opinion. The advisory group goes and reviews 3 similar transactions that took place in the same industry and with comparable business models to Company Z from the last 6 months.

The advisory team then calculates the EV-to-EBITDA multiple for these 3 comparable transactions. For this example, they use a 12-month period for those calculations. After analyzing the results of those computations, the advisory team provides a fairness opinion informing if the proposed value is fair for the type of transaction being considered.

From there, the leadership has this documentation to share and distribute to others. If you want to see an example of an opinion rendered and what that documentation looks like, here’s an example from Monsanto merging with Bayer that was filed with the SEC.

FAQs About Fairness Opinions

Q: Am I required to get a fairness opinion?

A: No, they’re not required, but they help reduce the risks associated with large deals. They also facilitate communication between leadership and shareholders.

Q: What’s the difference between a fairness opinion vs. valuation?

A: Both are important in a large transaction. Valuation though informs an actual transaction price, while the fairness opinion concludes how reasonable that price is.

Q: Where can I find a completed fairness opinion?

A: They’re accessible to the public as they’re filed with the SEC and stored in the EDGAR database. To find a sample fairness opinion, look for a document filed as an S-4.

Q: Who can provide one?

A: Fairness opinions are provided by qualified advisors, analysts, or an investment bank. Ultimately, it’s key that you find a qualified group with experience to minimize the risk of disagreements between shareholders and management on the final opinion.

The Benefits of Seeking A Fairness Opinion From A Trusted Advisory Team

Getting a fairness opinion can feel like just one more step to check off in the process of an M&A or other large transactions. But it’s important you deliberate carefully and choose the right partner.

You want to make sure you find a truly objective third party that’s clear of conflict of interests to obtain a helpful opinion.

In 2007 FINRA enacted Rule 2290 to have fairness opinions disclose contingent-fee conflicts as well as past/future business relationships that would be a potential conflict of interest when providing an opinion. That’s why we recommend finding an outside partner that can also help you avoid these types of risks.

When you work with Centri, our team brings years of experience to the table, as we’ve provided high-quality fairness opinions for a variety of industries. Plus, we can provide an objective finding that helps you avoid these conflict of interest issues.

Need help obtaining a fairness opinion? Learn more about how Centri’s fairness opinion services can support you.