The Importance of Fairness Opinions – Better Safe than Sorry

As we enter the year-end M&A transaction closing season, board members should closely analyze pending transactions to minimize deal-related litigation exposure.

Why would the Directors of a company need a fairness opinion?
For certain merger and acquisition (M&A) transactions, a fairness opinion should be obtained by an independent third party financial advisor to help protect a company’s directors against potential deal-related litigation which they may be held personally liable.

A fairness opinion provides protection under the “Business Judgement” Rule, a legal business principle which confirms that the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that business decisions were made in the best interests of the company. A fairness opinion, issued by a third party independent advisor, helps directors fulfill their fiduciary duties of loyalty and due care and increases the likelihood of protection under the “Business Judgement” Rule.

What is a fairness opinion?
A fairness opinion is an opinion which states whether or not a proposed business transaction “is fair, from a financial point of view, to the shareholders of the company”. In order to render a fairness opinion, a financial advisor would perform standard valuation methodologies as well as analyze the financial terms of the transaction.

What types of transactions may need fairness opinions?
Not all M&A transactions need fairness opinions. However, in certain situations, it’s highly recommended to obtain a fairness opinion. Some examples of these types of transactions are highlighted below:

  • Selling company with numerous shareholders
  • Potential conflicts of interest for buyer and/or seller
  • Significant divestiture or recapitalization
  • Selling company with an unsolicited offer and lack of an investment banking process
  • ESOP transaction
  • Venture capital-backed or private equity-backed selling companies with different classes of equity
  • Going private transactions
  • Reverse stock splits
  • Deals with multiple bids of varying forms of purchase price consideration (cash, stock, notes, etc.)
  • Deals in which directors’ and shareholders’ interests are not identically aligned

Given the current litigious business environment, it is important for any board to be able to document its process in evaluating the merits of any significant corporate action. Effectively using fairness opinions issued by outside advisors will ease the strain on board members to demonstrate their careful consideration of different shareholder groups’ varying points of view.

The McLean Valuation Services Group has extensive experience providing fairness opinions to assist directors in executing their fiduciary duty on an informed basis, in good faith, and in the honest belief that business decisions were made in the best interests of the company and its shareholders. Below we’ve highlighted some of our transaction opinion engagements:

ABOUT THE MCLEAN GROUP

The McLean Group is a leading investment bank that provides objective strategic and financial advice on mergers and acquisitions and business valuations. Our investment banking advisory and valuation services are built on comprehensive industry knowledge, extensive transaction experience, senior-level attention to every client engagement, and a real-time understanding of industry-specific value drivers. By partnering with clients and providing strategic advice through every phase of a company’s development, The McLean Group is uniquely positioned to support our clients’ long-term success.

Through a dedicated business valuation practice, we provide a comprehensive offering of objective valuation services, including financial security and intangible asset valuations for a variety of transaction, financial reporting, and tax purposes. We advise boards of directors, investors, trustees, and other corporate leaders on a range of issues, and render valuation opinions for equity inventive plans, ESOPs, fairness opinions, estate and gift tax valuations, intangible asset valuations, and litigation support.

BetterSafe
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