The Fairness Opinion Report: What it is and why it’s needed

Best Practices + Case Study

This article presents a case study of a company who asked Objective to create a Professional Fairness Opinion Report after encountering issues with the FCC. When the company value bottomed out, the Board of Directors was forced to make hard decisions about the company’s future. In order to do so, they engaged Objective as part of their decision making process.

Before we dive into the details of their story, let’s define a Fairness Opinion Report first.

What is a Professional Fairness Opinion Report?

A Professional Fairness Opinion Report is a formal and independent valuation provided by a qualified valuation advisory firm, such as Objective, to provide an opinion about whether or not a proposed stock price is fair for a specific financial transaction. This report is utilized in mergers, acquisitions, significant corporate actions, divestitures, or changes in ownership structures.

The report objectively analyzes transaction terms and pricing, ensuring it is fair to all parties, including shareholders and stakeholders. By relying on various financial valuation techniques, market benchmarks, and industry comparisons, the report provides a credible judgment on the equity and reasonableness of the proposed deal.

Professional Fairness Opinion Reports are vital in enhancing transparency, mitigating conflicts of interest, and instilling confidence among shareholders and other stakeholders involved in decision-making. For a board, an impartial independent opinion is a necessary requirement in many transactional settings, as it allows them to make informed decisions.

When is a Professional Fairness Opinion Report  Necessary?

Businesses obtain Professional Fairness Opinion Reports to assess various financial transactions, primary mergers, acquisitions, or significant corporate actions.  Examples include:

• Mergers:

  • To ensure that the merging of two companies is conducted at a fair price.
  • To provide shareholders with an independent perspective on the value of the deal.

• Acquisitions:

  • To validate the fairness of the price being paid for a company or asset.
  • To provide a third-party review of the terms of the acquisition.

• Significant Corporate Actions:

  • Share buybacks or repurchases.
  • Spin-offs or divestitures.
  • Asset sales.

• Restructurings:

  • Evaluating fairness in debt-for-equity swaps.
  • Analysis of recapitalization terms.

• Joint Ventures:

  • Assessing the value of contributions by each party.
  • Evaluating potential revenue and profit-sharing arrangements.

• LBOs (Leveraged Buyouts):

  • Ensuring that the financial leverage being used to buy a company is priced fairly.

• Private Placements:

  • Assessment of the fairness of pricing for privately placed equity or debt.

• Going-private transactions:

  • Evaluating if shareholders are receiving a fair price when a company decides to delist.

• Employee Stock Ownership Plans (ESOPs):

  • Ensuring that the price at which stock is being offered to employees is fair.

• Dividend distributions:

  • Analyzing the fairness of dividend distributions to various classes of shareholders.

• Compensation plans:

  • Evaluating stock-based compensation or incentive plans for fairness.

Using Professional Fairness Opinion Reports in these situations can offer companies, shareholders, and stakeholders an objective review and instill confidence in the financial aspects of such decisions. This helps mitigate conflicts of interest and assures shareholders and stakeholders that their interests are being considered and protected.

Fairness Opinions also aid in complying with regulatory requirements by fulfilling the legal and fiduciary duties of the Board of Directors to act in the company’s and its investors’ best interests. The report serves as a valuable defense when decisions are challenged, demonstrating the board’s commitment to ensuring a fair deal for all parties involved.

What are the typical Components of a Professional Fairness Opinion Report?

1. Executive Summary:

   A concise overview of the fairness opinion report, highlighting the essential findings and conclusions.

2. Transaction Details:

   A comprehensive description of the specific financial transaction being evaluated, including the parties involved, deal structure, and relevant terms.

3. Purpose and Scope:

   Clear explanation of the fairness opinion’s purpose, the analysis’s scope, and the methodologies used.

4. Market Analysis:

   A thorough assessment of the relevant market conditions, industry trends, and comparable transactions to provide context for the evaluation.

5. Financial Analysis:

   Detailed examination of the company’s financial statements, projections, and valuation using various techniques such as discounted cash flow analysis and industry peer comparisons.

6. Assumptions and Limitations:

   Transparent disclosure of the assumptions made during the analysis and any limitations that might affect the opinion’s accuracy and scope.

7. Supporting Documentation:

   Includes relevant data, charts, images, and graphs substantiating the analysis and conclusions.

8. Expert’s Qualifications:

   Highlights the qualifications and experience of the financial expert or advisory firm providing the fairness opinion.

9. Conclusion:

   Final determination of the transaction’s fairness and a thorough opinion explanation.

10. Appropriate Signatures:

    The report is signed and dated by the financial expert or advisory firm responsible for the analysis and opinion.

How Are the Results Delivered?

Once the fairness opinion report is complete, a fairness opinion letter is created and delivered to the Board of Directors. This letter, typically a concise document, presents the financial advisor’s ultimate conclusion on the transaction’s fairness. It outlines the methodologies and valuation techniques employed, the data analyzed, and the rationale behind the opinion. The fairness opinion letter is designed to be easily understandable by the Board of Directors, providing a clear and concise overview of the work performed, the findings, and the assessment of the deal’s fairness. It serves as a formal communication, assuring the board that an impartial and thorough evaluation has been conducted to support their decision-making process.

Following the delivery of the fairness opinion letter, your valuation advisor will often present the report formally to the Board of Directors. During this presentation, the valuation advisor elaborates on the critical aspects of the report, ensuring that the board fully understands the scope of the work performed and the limitations of the opinion. This is an interactive session that helps ensure clarity for everyone by highlighted the key findings, the conclusions, and the methodologies and rationale used to determine those conclusions.

The presentation may address any concerns or questions the board may have, providing additional insights into the fairness assessment. This interactive session allows the board to understand the fairness opinion comprehensively, reinforcing the process’s transparency and credibility. Ultimately, the goal of the presentation is to equip the board with the necessary information to make well-informed decisions, while also highlighting the impartiality and diligence of the financial advisor in their evaluation.

After presenting and discussing the results, the advisor can also help write proxy language for public disclosure as required by the Securities and Exchange Commission (SEC).

How Our Fairness Opinion Reports Benefit You

By engaging a reputable financial advisory firm like Objective, you ensure that the board has diligently upheld their fiduciary duties, providing a thorough evaluation of the transaction’s fairness.  The Fairness Opinion Report serves as a safeguard, providing a well-documented and credible defense in future disputes or legal challenges and instilling confidence among shareholders and stakeholders.

Objective’s work in this field is executed with diligence, attention to detail, and thoroughness, setting a benchmark for professional fairness opinions. Our team of experts meticulously examines all relevant financial data, conducts comprehensive market research, and employs robust valuation techniques to arrive at an impartial and well-substantiated conclusion. This commitment to precision and rigor enhances the credibility of the reports and strengthens the board’s decision-making process.

Our team goes beyond merely providing a report; we stand behind our work with unwavering support in the event of disputes. Our reliable and reputable team ensures that your board can confidently rely on the fairness opinion as a trusted resource in contentious situations. Objective prides itself on a client-centric approach, prioritizing the unique needs of each client with senior-level attention and tailored advice. We recognize the distinct nature of every transaction, and we partner closely with clients to address their specific concerns. Our process is custom-fit to each situation, ensuring clear and actionable insights for informed decision-making.

Why You Shouldn’t Skip a Thorough Fairness Opinion Report

Not having a professional fairness opinion report can expose the Board of Directors to potential legal consequences and risks. Without an objective assessment, shareholders or stakeholders dissatisfied with the transaction may raise legal challenges, claiming that the board did not act in their best interests. Without a fair opinion, the board’s decisions may be perceived as arbitrary or influenced by conflicts of interest, leading to reputational damage and possible liability for breach of fiduciary duty.

In addition, not commissioning a professional fairness opinion report could make it hard to defend your choices in future disputes. If the transaction’s fairness is challenged, an independent fairness opinion report strengthens the board’s position and provides evidence supporting its decision-making process. 

To mitigate these risks and ensure legal compliance, involving attorneys is essential. Legal counsel can advise the board on the appropriate steps to take and help ensure that the fairness opinion report meets all necessary legal requirements. Moreover, attorneys can draw upon relevant legal precedents to support the board’s actions and demonstrate that due diligence was conducted to protect the interests of shareholders and stakeholders.

Ultimately, a professional fairness opinion report, with legal guidance and consideration of precedents, is crucial for safeguarding the board’s reputation, mitigating legal risks, and fostering trust and transparency in financial transactions.

Case Study: A Fairness Opinion in Action

A life science medical company had several hundred million dollars in market capitalization. It came to light that the company had outstanding issues with the FDA and the FCC.

The board quickly replaced the CEO and went into a holding pattern while it evaluated its options.

After a lengthy discussion, the board identified two primary options:

1. Winding down the company and distributing the remaining cash to the shareholders.
2. Executing a reverse merger with a private company. In this option, a private company would own a controlling interest through the merger, have access to the public listing, and keep the remaining cash in the company to finance operations. The struggling company would receive a smaller share of the newly merged company.

The Board of Directors identified a private company willing to do the reverse merger outlined in option two above and hired Objective to evaluate how each option would financially impact shareholders.

The fairness report determined it would be fair to shareholders if the company kept the remaining cash in the business and proceeded with the reverse merger. When the public company announced the decision, shareholders voiced their concerns, and additional information about the private company came to light. Objective worked with their legal team to assess potential liabilities the public company would take on if the merger continued.

Objective advised the company to modify the transaction to include those liabilities in the negotiation. A new fairness opinion was written which satisfied shareholder concerns, and the company completed the transaction before their cash ran out.

Why You Should Choose Objective for Your Fairness Opinion Reports

As a boutique firm, Objective offers a distinct advantage by providing high-quality fairness opinions at a reasonable price, making our services accessible to a broader range of clients. The Valuation Advisory Practice at Objective includes experts who honed their skills at major audit and valuation firms. We bring a wealth of experience to the table without the typical cost associated with the larger firms. This expertise allows our team to deliver comprehensive and reliable assessments rivaling larger institutions.

We live by the motto, “Your Objective is Ours” and that means your journey is our journey. Your success is our goal. When you’re our client, we always value your desires, input, and personal insights.

Each team member provides personalized service and provides clients with senior-level attention and comprehensive advisory support throughout the process. This tailored approach ensures that each client’s unique needs are met, fostering a relationship of trust and confidence in their services.

Contact us today to discuss your needs.