Count on Plante Moran to respond when a fairness opinion is required
Corporate scandals over failed mergers and unjustifiable purchase prices have led to greater fiduciary responsibility for parties involved in managing and governing companies. As a result, interest in fairness opinions has increased as Boards and other key decision makers attempt to limit their liability through heightened due diligence and improved transaction processes.
A fairness opinion is not an opinion about the best price that can be achieved for a transaction but rather a judgment from a qualified and independent party regarding the appropriateness of a transaction based on the financial consideration being given or received. The provider opines as to the fairness of the transaction, from a financial point of view, to the company that has requested the opinion. Courts have determined that the mere procurement of a fairness opinion from a qualified party can, in most cases, significantly mitigate litigation risk for a management team or corporate board of directors making a decision about a contemplated transaction.
Situations to consider when requesting fairness opinions
The following characteristics point to the need for a heightened level of board oversight and potentially the procurement of a fairness opinion:
- Non-competitive sale process
- Several classes of equity
- Considerable executive severance
- Related party transactions
- Potential investor conflicts
- A high degree of uncertainty regarding the value of the contemplated transaction
Typically, the historical and projected financial information used in fairness opinions is obtained from the company and is not independently verified. Plante Moran would rely upon the accuracy of such historical financial information and projected financial results in preparing the presentation. Plante Moran also will conduct other due diligence it deems appropriate under the circumstances.
Depending on the scope of the fairness opinion, Plante Moran may consider any or all of the following factors when opining on the fairness of a transaction:
- Summary of key proposed transaction terms
- Strategic rationale
- Potential risks of the proposed transaction
- Overview of the organization structure
- Publicly-traded comparable company multiples
- Recently completed transactions
- Discounted cash flow analysis