A Briefing On Fairness Opinions
Any board decisions involving major corporate decisions that affect corporate value -- mergers, buybacks, spinoffs, acquisitions, going private -- need an objective "fairness opinion." Although most corporate directors are familiar with the value of fairness opinions, here's a cram course in how they work to protect you -- and how you may not be taking full advantage.
The fairness opinion is something like a notary public's seal for a major deal, examining price, terms, legality, and potential conflicts in relation to similar transactions. It's "almost like an insurance policy, telling the shareholders that what the board is doing is fair," observes Barry Steiner of the Florida firm Capitalink. And, like an insurance policy, a fairness opinion helps protect boards from legal second-guessing on their decisions after they've been made.
The fairness opinion is a black/white finding, stating either that the deal as presented seems fair or unfair, with no shadings in between. But the way an opinion is assembled, and how it's then reviewed by the board, can make a real difference in how well it stands up to legal challenge.
1. Look for the essentials that make a fairness opinion fair -- basic due diligence, analysis of risks, deal structure, pricing, potential conflicts, comparable benchmark transactions, and timeliness.
2. Tighten standards depending on how much "fairness" is demanded. "The transaction may involve an interested board member who's somehow affiliated with the company in the deal," notes Steiner. In these cases, bullet-proof the opinion by gathering a solid paper trail that shows the board member recusing him or herself from review of the deal, and by assuring that all aspects of a potential conflict are examined in the opinion.
3. Be aware of what things "are NOT included in a fairness opinion," counsels Ben Buettell, managing director with Houlihan Lokey Howard & Zukin investment bankers. "We're not being asked to find a better deal or the best price, just that the price is fair." Any tricky legal ramifications of a deal (antitrust, foreign trade, etc.) won't be considered. Also, the quality of data and the time allowed for analysis will affect the quality of the final opinion. Be aware that some unusual situations, such dealing with a secretive, privately-held deal partner, or demanding a rush effort, may result in problems down the road.
4. Ask questions. "This is not just a letter to the board, but an opportunity for directors to ask questions," says Steiner. "If I'm later asked by a judge or arbiter whether the board asked questions on the opinion, the answer had better be yes." Some questions to make sure are on your list: Are there any competitive companies left out of the comparisons, and if so, why? How much has the opinion issuer really talked with the other side? Were they forthcoming? Are projections verified, and do they seem reasonable? Are discounts needed for certain factors (lack of trading in the company's stock, etc.)?
Copyright © 2001 Ralph Ward's Boardroom INSIDER