Fairness Opinion Overview

Fairness Opinions
an Overview

Table of Contents
When a Fairness Opinion is Necessary
Components of a Fairness Opinion
Selecting a Financial Advisor
Approval Process
1

A Fairness Opinion is an independent evaluation of an M&A transaction by an experienced investment banker, or business appraiser, that states whether or not a transaction – from a financial point of view – is fair.
The fiduciary duty of a company’s Board of Directors falls under intense scrutiny in the course of a change-of-control transaction, such as:
Tender Offers (including LBO’s and going private transactions)
Purchases of Blocks of Securities
Affiliate and Insider Transactions
Mergers
Potentially Hostile Takeovers
Minority shareholders also rely on fairness opinions in the course of:
Asset Sales
Subsidiary Spin-offs
Joint Ventures
2

Directors can be exposed to significant personal liability during the course of an attempted or completed M&A transaction if they violate:
Regulation protecting Boards of Directors from lawsuits alleging a violation of their fiduciary duty
Provided directors made informed decisions and acted rationally upon them, they are protected
Business Judgment Rule
The responsibility to make rational judgments after obtaining all reasonably available information required to make an intelligent decision
Duty of Care
Duty of Loyalty
Requires directors to act in the best interest of the company, rather than in self-interest
3

The Fairness Opinion provides an important protection to the Board:
Business Judgment Rule
Supports the Board’s decision with sound methodology from professional valuation experts and evaluation of business rational to proceed with the proposed transaction
Works to cull information relevant to the decision-making process and present it clearly in one comprehensive and defensible document
Duty of Care
Duty of Loyalty
Investment bank establishes its credibility as an independent third party with no conflicts of interest
4

A fairness opinion discusses price, terms, and other unique characteristics of a transaction that impact the economics of a deal.
Deal economics are compared to similar historical transactions
Any unique considerations are explained and evaluated
Underlying assumptions to the transaction are scrutinized
Industry and economic trends are studied
Observations, impressions and commentary on site visits and
management interviews may also be summarized
5

A Houlihan fairness opinion includes:
Explicitly stated factors and the processes used to review the historical, current and forecasted outlook of the transaction
An explanation of the negotiated deal economics and an established valuation range within which the transaction is fair to shareholders
A statement of material facts that were investigated and verified, as well as those that were not
Any potential conflicts of interest, if any
6

Selecting a Financial Advisor
Considerations for choosing the right Financial Advisor include:
Reputation
Experience
Independence
Trust
Accreditation
Senior-level Attention
Fee
7

Approval Process
FINRA Rule 2290 (Safe Guard of Independence, Disclosure Requirements or Restrictions on Fairness Opinions) requires member firms to disclose the following information when preparing and issuing fairness opinions:
Any contingency fees, payment for rendering the fairness opinion, and/or serving as an advisor
Any material relationships that existed during the past two years or that are being contemplated
Any information fundamental to the valuation that was supplied to the issuer of the fairness opinion by the company requesting the opinion
Whether or not the fairness opinion was approved or issued by a fairness committee
Whether or not the fairness opinion comments on the fairness of payments to company insiders relative to that of shareholders
Written procedures for approval of a fairness opinion
8

Fairness Opinion Overview

by deliberaton on Jun 29, 2010

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Fairness Opinion Overview — Presentation Transcript