What is a Fairness Opinion?
In 1985, the Delaware Supreme Court ruled against Trans-Union Corporation for a negligent sale. The sale was unfair, and the company had not obtained outside approval of the validity of the transaction. Since then, public companies have tended to seek out an appropriate fairness opinion to shield themselves from litigation.
A fairness opinion is essential when there is the potential for a conflict of interest in a transaction. It is an evaluation of a deal by an independent third party as to whether a deal is a fair or not.
This is needed because sometimes it is possible for the board or a senior executive to benefit himself at the expense of shareholders or the company, and getting an outsider's evaluation of the deal sends a strong signal that the transaction is fair to the company.
What situations require a Fairness Opinion?
Mergers and acquisitions, leveraged buyouts, and going-public or going-private transactions.
Fairness opinions have become a standard part of transactions like those because they make sure that the deal is fair to all parties. Recently, however, concerns have deepened that the party rendering the fairness opinion may itself have a conflict of interest. This is of especial concern when the opinion is done by an investment bank that would gain from the transaction.
As such, the National Association of Securities Dealers drafted new regulations in 2005 that forced greater transparency, and that were passed in 2007. To comply with these regulations and satisfy regulators, it has become increasingly common to find impartial third parties to provide the analysis, or to obtain their approval in addition.