Fairness opinion: Overview, definition, and example
What is a fairness opinion?
A fairness opinion is a professional evaluation provided by a financial advisor or investment bank that assesses whether the terms of a proposed financial transaction, such as a merger or acquisition, are fair from a financial standpoint to the parties involved. This opinion is typically provided to the board of directors or shareholders of a company to assist them in making informed decisions about the transaction. It offers an independent assessment of the transaction’s value, helping ensure that all parties receive a fair deal.
For example, in an acquisition, the target company’s board may seek a fairness opinion to determine if the offered purchase price is fair given the company’s financial standing, market conditions, and comparable transactions.
Why is a fairness opinion important?
A fairness opinion is important because it provides an objective, independent perspective on the financial fairness of a proposed deal. It helps safeguard the interests of shareholders, directors, and other stakeholders by ensuring that the terms of the transaction reflect an accurate valuation and fair treatment.
For companies and boards of directors, obtaining a fairness opinion can reduce the risk of legal challenges from shareholders who may feel that a deal undervalues the company or is unfair. It also helps boost transparency and confidence in the transaction, particularly in cases of mergers, acquisitions, or other significant financial decisions.
Understanding fairness opinion through an example
Imagine a large corporation is considering acquiring a smaller competitor. The board of directors of the target company wants to ensure that the acquisition price offered by the acquiring company is reasonable and reflects the true value of their business. To assess this, they hire an investment bank to provide a fairness opinion.
The financial advisor reviews the company’s financials, market conditions, and similar industry transactions, and concludes that the offered price is fair based on these factors. This fairness opinion is then presented to the board to help guide their decision-making and to reassure shareholders that the deal is in their best interest.
In another example, a private equity firm is negotiating the sale of a portfolio company. Before proceeding, the firm seeks a fairness opinion from an independent financial advisor to ensure that the terms of the sale represent a fair value for the company, given its assets and performance.
An example of a fairness opinion clause
Here’s how a fairness opinion clause might appear in an acquisition or merger agreement:
“The Board of Directors of the Target Company has received a fairness opinion from an independent financial advisor confirming that the terms of the Acquisition Agreement are fair, from a financial point of view, to the shareholders of the Target Company. This opinion has been considered in the decision-making process and will be disclosed to shareholders.”
Conclusion
A fairness opinion is an essential tool for ensuring that the terms of significant financial transactions are fair to all parties involved. It provides an objective, independent analysis that can protect directors, shareholders, and other stakeholders from unfair deals and legal challenges.For businesses, obtaining a fairness opinion enhances transparency, reduces risk, and builds confidence in the decision-making process. For investors and stakeholders, it ensures that financial transactions are properly evaluated and that their interests are protected.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.