Fairness / second opinion

Fairness Opinions in M&A transactions

A Fairness Opinion is a fact-based report compiled by an advisor. The purpose of a Fairness Opinion is to provide an objective third-party analysis of the received proposals regarding the transaction. A Fairness Opinion is needed, for example, in a situation where the parties to the transaction want assurance that the arrangement will be made on reasonable terms to the parties. Opinions are most often requested as a part of M&A transaction, for example regarding valuations, synergies, risks, and the purchase price. A Fairness Opinion is usually a separate report prepared by an investment bank.

A Second Opinion, as its name implies, is second opinion, for example on valuation. A Second Opinion is relevant especially when the original Fairness Opinion was compiled by an advisor who is not independent of the transaction. Such situation may occur when the Fairness Opinion was compiled by the other party’s advisor.

Fairness Opinions and Second Opinions provide security for clients at different stages of the M&A process:

• An independent statement on price / valuation provides an objective third-party analysis of the deal’s fairness for decision makers.
• When contemplating a proposed transaction, Fairness Opinions provides protection to the board members.
• A Fairness Opinion mitigates risk of potential post-process litigation and claims.
• Banks may require Fairness Opinions and Second Opinions in their financing decisions.

Fairness Opinions in other cases

M&A transactions are not the only cases where Fairness Opinions or Second Opinions are used. The company may request a Fairness Opinion from an advisor on financing agreements, significant contracts, incentive schemes, realizations, feasibility studies, etc.

• Financing agreements: A Fairness Opinion may concentrate on evaluating covenant levels, ’headroom’, and overlapping covenants. Company’s key figures can be simulated to identify appropriate covenant levels.
• Incentive schemes: A Fairness Opinion may concentrate on evaluating whether the incentive scheme supports the company’s business plan and strategy. In addition, a Fairness Opinion may evaluate the fairness and cost-effectiveness of the incentive scheme.
• Realizations: A Fairness Opinion may concentrate on evaluating the price of transaction. For example, in the event of bankruptcy, the bankruptcy trustee may request a Fairness Opinion on the purchase price or related party transaction.
• Shareholders’ agreements: it is recommended to use a financial advisor regarding the final determination of the purchase price mechanism in connection with the transfer of shares.

It is common for the rush to increase in the final stages of arrangement, but there should still be time to make an independent Fairness Opinion. Including an opinion provider early in the process will allow a final opinion to be given within a reasonable time.

CAG has compiled several Fairness Opinions and Second Opinions for its clients, including valuations, transaction prices, business plans, financing arrangements, incentive schemes, realizations, feasibility studies, etc.