When a company's board considers a merger, sale or other significant transaction, it often asks a financial advisor for a fairness opinion: a letter stating whether, in the advisor's view, the financial terms are fair, from a financial point of view, to a particular party. The opinion is a familiar part of corporate transactions. It is also frequently misunderstood.
This note offers a general explanation for directors and management teams. It is not legal advice, and the role of a fairness opinion in any particular transaction should be discussed with counsel.
What a fairness opinion is
A fairness opinion is a financial analysis of a proposed transaction, summarized in a conclusion about whether the consideration is fair from a financial point of view. It typically draws on several valuation approaches and on information provided by the company and its management. It can help a board demonstrate that it considered the financial terms carefully before reaching its decision.
What it is not
- It is not a recommendation on how to vote or whether to proceed.
- It is not an opinion that the price is the best available.
- It does not address the business merits or strategic wisdom of the transaction.
- It generally relies on information provided to the advisor rather than independently verifying it.
“A fairness opinion informs a board's judgment. It does not replace it.”
Why disclosure matters
Because the firm giving a fairness opinion may also be advising on the transaction, and may be paid in part on its completion, the opinion's independence is a fair question. FINRA Rule 5150 addresses this by requiring member firms that provide fairness opinions to disclose certain matters, such as whether the firm acted as financial advisor to a party, whether its compensation is contingent on the transaction, material relationships with the parties, and whether the opinion was approved by a fairness committee.
Slate Blue Summit provides fairness opinions under a dedicated Fairness Opinion Committee and written procedures, so that each opinion is reviewed by people outside the deal team before it is issued.
Questions for directors
Directors relying on a fairness opinion should understand who prepared it, how the advisor is compensated, what information it relied on and what valuation methods it used. Reading the disclosures carefully, and asking the advisor to walk through its analysis, is the best way to make sure the opinion serves its intended purpose: to inform the board's own decision.
Perspectives are general information and reflect the views of Slate Blue Capital at the time of writing, which may change without notice. They are not investment, legal or tax advice, do not describe or offer any security, fund or service, and should not be relied on in making an investment decision. See Important information.