March 31, 2023

Fairness Opinions: One Tool in the Board’s Toolbox

This Perkins Coie blog provides an overview of the role that fairness opinions can play in helping boards of directors fulfill their fiduciary duties. This excerpt summarizes why boards should consider fairness opinions in appropriate circumstances:

Courts give special deference to Boards that seek truly independent third-party advice, such as that of an investment bank, valuation consultant or law firm, to assist disinterested directors in assessing a transaction. An opinion from a reputable third-party financial advisor that a transaction is fair to the company and its shareholders from a financial point of view may substantially reduce the risk of a successful challenge to the Board’s decision under any standard of review. A fairness opinion can also help independent directors make an informed decision.

Fairness opinions are typically thought of as coming into play in connection with M&A, but in some cases they may also have a role to play in the board’s evaluation of related party transactions. As someone who represented investment banks in a lot of fairness opinion engagements over the years and who sat in on more fairness opinion committee meetings than I care to recall, I would like to throw in a few caveats when it comes to fairness opinions.

The reason for engaging an investment bank to furnish a fairness opinion is that, in fulfilling their fiduciary duties, state corporate statutes typically permit boards to rely in good faith on expert guidance, but only if the directors reasonably believe that the matter is within the expert’s professional competence. That can be a problem when it comes to framing what the opinion will cover.

Many lawyers representing boards want the banker to opine as broadly as possible about the fairness of the deal. This “sprinkling holy water on the deal” approach to the opinion is counterproductive and – in the unlikely event that the bank would agree to do that – could undermine the board’s ability to rely on the bank’s opinion, because it’s easy to challenge whether the bank is truly an expert with respect to such matters. Investment banks’ expertise is in the financial aspects of a transaction, and so what they are generally willing to address is the fairness, from a financial point of view, of the price to be paid or received in the transaction.  And that’s really what it’s appropriate for boards to ask them to cover.

Another issue that sometimes comes up in negotiating a fairness opinion is the “fair to whom?” question. Some lawyers will press for the opinion the fairness of the consideration to the company’s stockholders in situations that don’t involve a sale of the company.

That’s standard language in an opinion addressing a sale, but bankers usually won’t agree to this in buy side or other opinion engagements addressing transactions in which stockholders aren’t being paid. The bankers’ position is that whether the transaction is in the best interests of stockholders is a board decision, and so their opinion should address only the fairness to the company of the consideration to be paid or received.

John Jenkins