Fairness opinion definition
/What is a Fairness Opinion?
A fairness opinion is an analysis of a purchase offer by a valuation firm or investment bank, stating whether an offer made to acquire a target company is fair. This opinion gives the board of directors of the selling entity a defense in case it is later sued by investors for negligence in having sold the business for too low an amount. It is particularly useful to have when there are multiple bidders for the target company, and there is a risk that the losing parties will sue. The opinion is typically compiled late in the negotiations between the buyer and seller, since doing so any earlier would be a waste of money if the deal were to fall apart. Fairness opinions are rarely used when transactions are between privately-held companies, since there are so few shareholders involved that a lawsuit is much less likely.
Related AccountingTools Courses
Business Combinations and Consolidations
CPA Firm Mergers and Acquisitions
Advantages of a Fairness Opinion
The fairness opinion does not state whether the bid price is the best one that could be obtained, only whether the price is fair. Thus, the fairness opinion only mitigates the liability of the board of directors. Nonetheless, it can be an important defense if a public company is involved in an acquisition transaction, since there is a greater chance that one of its many shareholders will sue the board over the transaction. It may be of particular importance where there appear to be anomalies in the acquisition transaction, such as a deal with a related party or where there was only a single bid.
Disadvantages of a Fairness Opinion
There are some concerns about fairness opinions. First, they are expensive – a six-figure or several million-dollar fee is not uncommon. The high price is charged because the entity working on it is highly skilled and is also under considerable time pressure – usually just a few days to a week in which to complete the report. Also, the fairness opinion could be used as evidence in a shareholder lawsuit, so it needs to be precise. Thus, the elements of skill, time pressure, exactitude, and risk combine to yield a high price for the opinion. There is also a concern that some fairness opinion work is handed to the investment banks already involved in an acquisition transaction, which means that they will also be paid a contingent fee if the business is sold. Thus, an investment bank that is involved in both an acquisition and the fairness opinion is not necessarily an impartial observer.