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A fairness opinion is a statement from a third party, often an investment bank, on whether the terms of a financial transaction involving a public company are reasonable. It helps company officials fulfill their fiduciary duty to shareholders and can be used in negotiations or legal disputes. The opinion is only as good as the information provided and may come from a conflicting party. Shareholders can use it to evaluate whether their interests are protected and may file a lawsuit if they feel they are not.
A fairness opinion is a statement about a proposed financial transaction involving a public company that indicates whether or not the terms of the transaction are reasonable. Such opinions are solicited from third parties in the interests of shareholder protection. The third party offering the opinion is often an investment bank and charges a fee for the fairness assessment service.
When a company is publicly traded, board members have a fiduciary duty to shareholders. This means they have to make sound financial choices while being in charge of the business. The interests of the shareholders are the most important factor, and officials cannot take measures that would lead to a devaluation of the shares. Receiving a fairness opinion prior to a proposed transaction allows company officers to fulfill their fiduciary duty by confirming that a transaction will benefit the company and, by extension, shareholders.
While not required, equity views are extremely common for transactions such as mergers, acquisitions, privatizations, and spin-offs. Company officials can use the statement to cover themselves so that if a deal is disputed, they can state the fairness opinion to show that they acted reasonably. The document can also be useful in negotiations; if it reveals that the security is not valued fairly, for example, this can be used to renegotiate the terms of the deal to ensure it will go through.
To prepare a fairness opinion, the third party needs access to the facts surrounding the deal. The opinion is only as good as the information provided. If the company obscures data, fails to disclose key details, or misrepresents information, the fairness opinion cannot compensate for this and will be incorrect. It is also important to note that such professional advice may potentially come from a conflicting party of interest to the transaction. Disclosure of such conflicts is required in some regions, while in others it is not.
Shareholders can use a fairness opinion to evaluate a proposed transaction to determine whether their interests are protected and represented by company officials. If shareholders feel that they are not being duly considered in the deal, they can file a lawsuit against the company and its representatives. Such lawsuits may force companies to complete or abandon transactions for the benefit of shareholders. They may also involve compensation payments.
Smart Assets.
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