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 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]

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]