Fairness opinion

A fairness opinion is a professional evaluation by an investment bank or other third party as to whether the terms of a merger, acquisition, buyback, spin-off, or privatization are fair.^[1] It is rendered for a fee.^[2][3] They are typically issued when a public company is being sold, merged or divested of all or a substantial division of their business. They can also be required in private transactions not involving a company that is traded on a public exchange,^[4] as well as in circumstances other than mergers, such as a corporation exchanging debt for equity.^[5]Some of the specific functions of a fairness opinion are to aid in decision-making, mitigate risk, and enhance communication.^[6]

Controversy

Controversy in financial and management circles surrounds the question of the objectivity of fairness opinions, as one aspect of the duty of care in the fairness of a transaction. A potential exists for a conflict of interest when an entity rendering an opinion may benefit from the transaction either directly or indirectly.^[7] Directors and officers of the companies also may have an interest in the outcome of the proposed transaction.^[8] In response, in the United States, the Financial Industry Regulatory Authority (then the National Association of Securities Dealers) issued its Rule 2290 to require disclosure by its members to minimize abuses;^[9] this was approved in 2007 by the Securities and Exchange Commission.^[10]

Equity and fairness

In the United States, in the context of stockholder lawsuits,^[11] typically relating to the sale or merger of a public company, the Delaware Court of Chancery has required sufficient disclosures be made to a board of directors and shareholders to “provide a balanced, truthful account of all matters”^[12] and said “When a document ventures into certain subjects, it must do so in a manner that is materially complete and unbiased by the omission of material facts.”^[13] In a Memorandum Opinion in the CheckFree/Fiserv merger Chancellor Chandler underlined that the earlier In re Pure Resources Court had established the proper frame of analysis for disclosure of financial data: “[S]tockholders are entitled to a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely.”^[14] According to the certification hypothesis fairness opinions may also serve the interest of the shareholders by mitigating informational asymmetries in corporate transactions.^[15]

References

External links

Example Fairness Opinions (SEC filings) relating to the merger of Merck & Co., Inc. and Schering-Plough Corporation:

• J.P. Morgan
• Goldman Sachs
• Morgan Stanley

Corporate finance and investment banking
Capital structure	Convertible debt Exchangeable debt Mezzanine debt Pari passu Preferred equity Second lien debt Senior debt Senior secured debt Shareholder loan Stock Subordinated debt Warrant
Transactions (terms / conditions)	Equity offerings At-the-market offering Book building Bookrunner Corporate spin-off Equity carve-out Follow-on offering Greenshoe Reverse Initial public offering Private placement Public offering Rights issue Seasoned equity offering Secondary market offering Underwriting Mergers and acquisitions Buy side Control premium Demerger Divestment Drag-along right Management due diligence Managerial entrenchment Minority discount Pitch book Pre-emption right Proxy fight Post-merger integration Sell side Shareholder rights plan Special situation Squeeze out Staggered board of directors Stock swap Super-majority amendment Tag-along right Takeover Reverse Tender offer Leverage Debt restructuring Debtor-in-possession financing Financial sponsor Leveraged buyout Leveraged recapitalization High-yield debt Private equity Project finance
Valuation	Accretion/dilution analysis Adjusted present value Associate company Business valuation Conglomerate discount Cost of capital Weighted average Discounted cash flow Economic Value Added Enterprise value Fairness opinion Financial modeling Free cash flow Free cash flow to equity Market value added Minority interest Modigliani–Miller theorem Net present value Pure play Real options Residual income Stock valuation Sum-of-the-parts analysis Tax shield Terminal value Valuation using multiples
List of investment banks Outline of finance