When Is a Fairness Opinion Required
A fairness opinion doesn't set the transaction's price; it's an independent assessment documenting that the board's decision process was proper and diligent.
The core function of a fairness opinion
A fairness opinion is an independent financial advisor's written opinion on whether a proposed transaction (sale, merger, major asset transfer) is financially fair to shareholders.
This opinion doesn't guarantee the deal is the best possible price; it only confirms the proposed terms fall within a financially reasonable range.
Its value as legal protection for the board
Particularly in transactions with potential conflicts of interest, such as a management buyout or related-party transactions, an independent fairness opinion provides strong evidence that the board has fulfilled its duty of care.
This document can play a critical role in defending the board's decision process if a shareholder lawsuit follows the deal.
Which transaction types typically require it
Public company mergers and acquisitions, going-private transactions, related-party deals, and major asset sales are the transaction types where a fairness opinion is most commonly requested.
While not mandatory at private companies, it can still be preferred at companies with numerous minority shareholders or a complex shareholder structure.
Preserving independence
If the advisor preparing the fairness opinion also earns a success fee from the deal, that can raise questions about its independence; that's why some boards prefer to get a second opinion from a separate, flat-fee advisor.
The advisor's prior relationships with the other party or one of the parties to the deal should always be disclosed as a factor that could affect the opinion's credibility.
The scope of the valuation methodology
A fairness opinion typically uses multiple valuation methods together (discounted cash flow, comparable company multiples, comparable transaction multiples) and tests whether the proposed price falls within the value range these methods produce.
Transparently disclosing the methods and assumptions used directly affects the opinion's credibility and defensibility.
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Learn moreFrequently asked questions
Does a fairness opinion guarantee the deal will happen?
No; it only provides an independent opinion that the proposed terms are financially fair, and doesn't decide whether the deal gets approved.
Who prepares a fairness opinion?
Typically investment banks or independent financial advisory firms.
Is this opinion disclosed publicly?
Usually yes for public company transactions; it's presented to shareholders as an appendix to deal documents such as the proxy statement.
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