Using Fairness Opinions to Manage Risk in Middle-Market Transactions

Fairness Opinions Help Mitigate Conflicts of Interest, Establish Transaction Credibility, and Avoid Unfavorable Tax Issues

Brian A. Sullivan and Andrew C. Smith discuss how you can leverage fairness opinions to mitigate conflict of interest, avoid unfavorable tax issues, and help secure acceptance of transactional decisions by minority shareholders.

Since the 2008 financial meltdown and the earlier enactment of the Sarbanes-Oxley Act of 2002 (SOX), there has been an ever-increasing outcry from the public for greater corporate transparency, accountability, and fairness. But this heightened awareness and perceived lack of trust in the markets has created a dangerous environment for boards of directors; they must now demonstrate that they acted prudently and fairly, and considered shareholders’ opposing interests, whatever their stock—preferred, common, or convertible—when evaluating acquisition and divestiture opportunities.  Brian A. Sullivan and Andrew C. Smith explain in CPA Journal how fairness opinions can help:

Transaction fairness is an issue that affects more than just public companies. Traditionally, privately held middle-market companies have had little use for fairness opinions because such companies often have few shareholders or are owned by one group of family members. But as middle-market companies require more sophisticated capital structures to fund growth and expand into new markets, obtaining a fairness opinion may be worth the effort. Given the current litigious business environment, there is a growing demand for fairness opinions in the middle-market, in part for the following reasons:

• Fast-growing companies often have a large number of shareholders, which is needed to raise capital but also increases risk and exposure
• Down rounds of investment increase the scrutiny and potential acceptance of a transaction by minority shareholders
• Growing private equity groups often find themselves with potential conflicts of interest, which a fairness opinion can help mitigate
• Not-for-profit organizations may be divesting or acquiring a line of business that may create unintended consequence and unfavorable tax issues

 

Effectively using fairness opinions created by outside advisors will ease the strain on board members to demonstrate their careful consideration of different shareholder groups’ varying points of view. In addition, understanding fairness opinions and the legal precedent that applies to them can aid CPAs who advise CEOs, CFOs, and boards of directors on managing risk in proposed business transactions.