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Fairness Opinion or Valuation: Does one size fit all
During the last decade, there was an overall increase in the number of transactions including mergers, acquisitions, leveraged buyouts, management buyouts, privatizations, corporate restructurings, and tender offers. Did you know that for public companies, the majority of these transactions require the procurement of a Fairness Opinion by an independent financial advisor? Such opinions support the consideration of financial terms of a transaction and provide a legal cornerstone of support. This seven-page white paper dispels a common mistake with regards to what is required by public companies. Often Valuations are commissioned only to find later that the Board is left holding the proverbial liability bag. Don't be caught unaware; this paper could the crash course you and your board need to avoid a head-on litigation collision. During the last decade, there was an overall increase in the number of transactions including mergers, acquisitions, leveraged buyouts, management buyouts, privatizations, corporate restructurings, and tender offers. The majority of these transactions required the procurement of a Fairness Opinion by an independent financial advisor. Such opinions support the consideration of financial terms of a transaction and provide a legal cornerstone of support. Today, the average legal and settlement cost of a director's lawsuit is over $6 million. A growing number of courts are viewing controlling shareholders and directors of all public and closely held corporations as having broader fiduciary responsibilities to all shareholders, and now require objective evidence that directors have made careful, educated, and responsible decisions. A Fairness Opinion may help constitute such objective evidence and could be necessitated by any of the following: Employee Stock Option Plans, M&A, Restructurings, Financings, Privatizations, Shareholder Issues, Litigations, Recaps, and tax issues. Additionally, as of 2002 most corporations were required to conform to a newly crafted FASB statement concerning goodwill accounting. The pooling method of accounting for transactions was eliminated and goodwill must be tested at least annually for impairment. But the question in many director’s mind is which does our company need a valuation or fairness opinion. First, it’s important to understand the difference. Business valuation is a mix of art and science the result of which is a way of estimating a fair price for the business. Several of those methods are described in other white papers in this section. It is common to value a business by a number of different methods and use an average (or more likely a weighted average that gives more weight to some methods than to others) of the various methods used. Note that there are a number of reasons for valuing a business, other than buying or selling it. Businesses are valued for estate and tax purposes, divorce settlements, and for raising capital. Valuations are “neutered” in that they assume a hypothetical buyer and seller and nothing else. A fairness opinion on the other hand is a report of a financial analysis of a business transaction. The focus of the analysis is to determine whether a particular transaction is fair from a financial standpoint to a specified party to the transaction. Thus, unlike a valuation, it is event specific. Fairness analyses are often used to insure the fairness of a transaction to a particular set of parties who are not directly involved in the negotiation of the transaction, such as shareholders or retirement plan beneficiaries. Fairness analyses are often commissioned by company directors and officers so that they may have the benefit of assurance from an independent outside party that a transaction is fair and may demonstrate that they have taken steps to assure others that the transaction is fair. WHY FAIRNESS OPINIONS ARE NEEDED As mentioned, valuations are a way to gauge the worth of a business under hypothetical control like parameters; it’s rather like a financial Petri dish. A fairness opinion however is obtained by a company's board of directors to provide them with assurance that the price or terms of a particular transaction are fair and reasonable to shareholders. Also, a fairness opinion protects the board of directors from potential legal matters which may arise if the transaction is not as successful as originally planned. Determining whether a transaction is equitable is usually the foray of the courts however; the judicial system uses a standard called the “Business Judgment Rule” to measure the efficacy of transaction. The Business Judgment Rule is a rule granting directors of publicly listed companies' immunity from liability if their actions are executed in good faith, using sound business judgment and exercised with reasonable care. Under the business judgment rule, the governing board of a corporation is free to use its own business judgment as to the use of corporate assets, as long as the board acts in what it believes to be the corporation's best interests. Under this standard of care, in the absence of bad faith, fraud, or conflict of interest, the courts will not question the decisions, including the investment decisions, of boards of directors. Essentially, fiduciaries should act: on an informed basis, in good faith manner, in a manner they believe to be in the best interest of shareholders and other appropriate grounds and without fraud, malice or self-dealing. [continued...] Want to know more? Download the White Paper "Fairness Opinion or Valuation: Does one size fit all" for just $9.95. People who ordered this paper also ordered: |
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