All's Not Fair in Love and Mergers.

• Author: Gordon, Jeffrey M.

A fairness opinion affirming that a merger or sale transaction is financially fair to a company's shareholders is an important but frequently overlooked risk management technique. Such opinions are required in deals involving public companies. Yet there are often compelling reasons for privately held businesses to obtain them, too. Armed with a fairness opinion, a company's senior management and board of directors can make better-informed decisions about a change-of-control transaction and avoid possible turmoil down the road.

The fiduciary duties of the board of directors have come under increasing scrutiny in the last 20 years as M&A activity has exploded. SEC regulations and key court decisions, especially in the 1980s, established a clear standard for boards of public companies (including, but not limited to, those being acquired) to make "informed decisions" using the Business Judgment Rule. Essentially, boards considering change of control transactions are required to exercise due care, act in good faith and in a disinterested manner and not abuse their discretionary position.

These requirements have led boards to hire financial advisors as independent third parties, providing evidence that a board has complied with the Business Judgment Rule and to assist directors in decision-making. The fairness opinion has become the universally accepted tool to prove such compliance.

Why Private Companies?

The boards of private companies are increasingly following their public counterparts and obtaining fairness opinions in change-of-control transactions for many reasons. On the simplest level, private companies are also subject to the risk that complex capital structures and different classes of ownership will uncover differing interests among shareholders -- and the likelihood that a group of disgruntled shareholders will challenge a transaction.

In addition, the very nature of privately held companies poses particular risks in mergers and sales. For example, many privately held businesses are family-owned, which introduces uniquely complex relationships and potential conflicts. Disputes between family members -- especially those in management vs. those outside the company -- are common.

Similarly, private family-owned businesses often lack outside board members, so many don't have the expertise or independence to fully evaluate a transaction's fairness. Alternatively, the management of a private company may already hold an interest in the...