Fairness Opinion

An assessment, typically in the form of a letter, prepared by experienced appraisers, analysts, or investment bankers (typically independent of the transaction) addressed to a company’s board of directors or a special committee of the board of directors, which addresses the fairness of a proposed course of action or transaction from a financial point of view. Usually no further assessment or statements are made in a fairness opinion and it will not contain a specific recommendation as to how directors should act in connection with the matter (or inter alia how shareholders should vote), nor in a full form merger does it usually offer an opinion as to the investment quality of the securities (shares) at issue.

Although fairness opinions will often appear in mergers or other transactions, they are in reality of limited real merit for two reasons: first, management is unlikely to solicit a fairness opinion from anyone who would provide a negative response, i.e., they will only formally ask for the opinion once they know that answer will be that management’s proposal is fair (indeed it often suggested that advisors on transaction typically recommend as providers of the opinion other advisors for whom they regularly serve in the same role, creating somewhat of a quid-quo-pro); second, for a transaction to be “fair,” it only needs to fall in the range of vaguely defined fair market values (which in a merger usually is somewhere in the normal trading range for companies over a time interval, the length of which can be varied as necessary), which may mean that the price that a seller may receive may not be the highest price possible, or the price the buyer pays may reflect an inflated value over present market value.

Where a fairness opinion in a public company transaction can only be obtained from the bank or other advisors executing the transaction it is usually regarded with some suspicion of the “they would say that, wouldn’t they” variety, and questions as to why a third party bank could not be found willing to render the opinion. Even when obtained from third parties to the transaction, fairness opinions are usually so hedged with qualifications and ‘assumptions on which it is based’ language, that the main apparent advantage of fairness opinions is that they provide legal ‘cover’ for boards of directors or management in accepting or recommending transactions.

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