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Fairness opinions are regularly obtained by boards, special committees and other fiduciaries to gain a comprehensive understanding of the financial aspects of a transaction and to demonstrate they have made their decision with due care.
It is considered best practice to obtain a fairness opinion for any significant transaction that could affect shareholder value, especially if the deal will receive more scrutiny, such as in: Material transactions. Related-party transactions.
A fairness opinion will state that the economic terms of a transaction (i.e., price) is fair, from a financial point of view, to a particular stakeholder (i.e., the company or shareholders).
Fairness opinions are not always required in transactions involving public companies, but they can be helpful in reducing the risk associated with major financial actions or purchases, including the risk of litigation.
A Fairness Opinion Example Say that Company X has made an offer to purchase Company Z. As part of doing due diligence, the leadership board of Company Z decides to work with an objective advisory firm independent of the deal to obtain a fairness opinion.
A fairness opinion is a letter summarizing an analysis prepared by an investment bank or independent third party, which indicates whether certain financial elements in a transaction, such as price, are fair to a specific constituent, from a financial point of view.
Dimech-DeBono: Both valuations and fairness opinions play a key role in the decision making process around a transaction. It sounds simple enough that the valuation range should inform the transaction price and the fairness opinion should inform the reasonableness of such price and general terms of the transaction.
The investment banking Fairness Opinion is filed along with all the other documents related to the transaction (the definitive agreement that includes the terms of the acquisition, for example), and serves as evidence when lawsuits start arriving.