For more than 30 years, fairness opinions have played an integral role in merger and acquisition (M&A) and related corporate transactions. While fairness opinions were issued for deals prior to the mid-80s, the 1985 ruling in the Smith v. Van Gorkom case earned fairness opinions a much more prominent place in the deal process.
Yet, the marketplace continues to struggle with a lack of consistent standards and methods, as well as perceived conflicts of interest where fairness opinions are concerned. Specifically, fairness opinions are often:
- Considered a “check-the-box” activity with little attention paid to (or analytical support surrounding) how the opinion was formed.
- Conducted by the same party that is advising the target company (or the buyer) on the transaction and for a fee that is contingent on the successful completion of the deal, which represents a clear conflict of interest.
- Subjective; developed using a wide variety of methods and assumptions that can lead to equally varying values to support “fairness,” or value ranges so broad that they’re essentially meaningless.
It’s important to place these concerns in proper context. While fairness opinions are solicited for virtually all M&A and related corporate control transactions, they’re typically obtained at the tail-end of the transaction, usually when the deal closing is pending. That puts additional pressure on the parties managing the transaction to choose a fairness opinion provider who can execute under intense deadline pressure and without inordinately driving up costs. As a result, it’s not uncommon for companies to devote an inadequate amount of time searching for a qualified independent advisor, and instead rely on the investment bank that structured the transaction. The downside of this approach is the potential for conflicts of interest and/or opinions that fail to hold up in court if challenged.
There’s little question that an inherent conflict of interest exists in situations where the investment bank conducting the deal also receives a separate fee for issuing a fairness opinion for that deal. Many critics have objected to this perceived lack of objectivity as well as the practice of “front-loading” a portion of the bank’s fee. This is often viewed as a way for banks conducting deals to “insure” a portion of their fee should a deal fall through.
Another concern that’s played out over the past three decades is the lack of consistency in the practices and procedures used to assess and demonstrate the financial fairness of a transaction. This is due in large part to the fact that no formal standards or guidelines exist governing the methodologies and analyses used to perform fairness opinions. Instead, the rigor of the analyses performed is only tested in the event that the opinion is challenged in court.
Both opinions and their underlying analyses have been subject to increased litigation and scrutiny by the courts in recent years due in part to heightened concerns about transparency and objectivity in the wake of the financial crisis. In fact, more than half of all M&A deals valued over $100 million are challenged, and in the last 10 years, the percentage has increased by 20%.
That’s why it’s more important than ever for stakeholders to select an independent financial advisor whose opinions and analyses can withstand scrutiny. Download our paper to learn more about how fairness opinions have evolved, the critical role they continue to play in supporting transaction value and decision-making, and why it’s important for stakeholders to solicit opinions from experienced independent providers.
Download the paper now.