Fairness Opinions

In general, a fairness opinion is an analysis conducted by a third-party valuation firm or investment bank that assesses whether the pricing, terms and consideration related to a transaction are fair, from a financial point of view.

If properly done, a fairness opinion is a powerful method to protect boards of directors, trustees and other corporate fiduciaries from transaction-related liability.  Too often, fiduciaries solely associate fairness opinions with acquisitions of large, publicly traded companies.  Indeed, obtaining a fairness opinion is a best practice when considering a wide range of transactions, including minority redemptions, recapitalization, combinations and spin-offs, just to name a few.  Moreover, a fiduciary’s duty of care is no less important when such transactions involve a closely-held company.  Deeming fairness opinion studies too expensive, time consuming, or simply unnecessary, fiduciaries of privately held firms routinely engage in corporate transactions without relying on them and exposing themselves to additional risk.  In reality, these same fiduciaries of closely-held companies may, in fact, be more at risk than their publicly traded counterparts due to heightened appearances of conflicts of interest and self-dealing.

Fairness Opinion Clients:

  • Boards of directors or special committees to the board of directors
  • Trustees
  • State Attorneys General

Situations that may give rise to fairness opinion or adequate consideration opinion:

  • Acquisitions
  • ESOP transactions (purchases or sales)
  • Stock redemptions
  • Recapitalizations
  • Related party transactions
  • Acquisitions of non-profits


Solvency Opinions

When considering highly leveraged transactions such as dividend recapitalizations or large stock redemptions, directors would be wise to explore the applicability of a solvency opinion.  The solvency analysis would consider the following post-transaction conditions:

  • Balance sheet test – determining whether the sponsoring company’s assets exceed its liabilities.  This test often involves a valuation of the firm’s tangible and intangible assets.
  • Cash flow test –  determining whether the borrower may have the financial capacity to repay its liabilities when they come due.  This test would involve the development of projections that contemplate a range of operating scenarios.
  • Adequate capital test – considering the capital cushion the borrower will retain relative to industry and historical norms, with a view to assess the company’s ability to withstand a downturn.

Situations that might give rise to a solvency opinion include:

  • Leveraged buyouts or highly levered ESOP transactions
  • Dividend recapitalizations
  • Large stock redemptions

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