Are fairness opinions a good thing? The issuance of fairness opinions on the value of mergers is fairly common practice, but a survey of FEI members finds varying thoughts about their worth.

• Author: Marshall, Jeffrey
• Position: M & A ISSUES

Many investment banks are willing and eager to offer "fairness opinions" about a merger or acquisition, as part of a company's due diligence. In essence, the opinion focuses on whether or not the transaction is fair to shareholders, whether the company is a buyer or seller.

While such opinions are used most often to review the suitability of the acquisition price, they are also used in a variety of other situations where an outside financial opinion is necessary. "Fairness opinions are particularly important when the transaction is not arms-length, or market, such as an insider-led financing or a management buyout," notes investment banking boutique ChessieCap Inc. (see box on this page).

Fairness opinions are generally considered a direct outgrowth of the "business judgment rule," which specifies that boards of directors and management have a fiduciary responsibility to act responsibly on behalf of shareholders. If they do so, they are protected from liability in situations where they can argue that they exercised due care, acted in good faith and avoided conflicts of interest.

How do financial executives feel about using fairness opinions? Financial Executive asked Thomson Financial Corporate Services to develop a survey on the subject. The result was a questionnaire that was emailed to FEI members late this summer; more than 100 members responded, and the results were analyzed by Thomson.

Data from the survey appears in several tables in this article. About 46 percent of the respondents had the title of CFO; another 23 percent had senior finance titles; 17 percent were controllers and 11.5 percent were treasurers. Market capitalization at their companies ranged from under $500 million to north of $50 billion.

In general, the respondents believe fairness opinions are worthwhile; 73 percent said they would consider their use, but for a flat fee that wasn't contingent on deal completion. "Yes, we would get a fairness opinion, but not be restricted to only firms not involved in the transaction," noted the CFO of a midcap financial services firm (respondents were provided anonymity on any comments but were asked to identify their company size and industry).

However, there were mixed signals on motivation: Almost two-thirds of the respondents said the primary purpose of the opinion would be to mitigate potential lawsuits (in other words, as a defense if a suit challenged the deal price). Just 25 percent said they were looking for an objective...