A fairness opinion is a special letter report, which can be supported
by a memorandum, from a financial advisor to the board of directors of
a company being sold. Such a letter opines on the fairness of the transaction,
from a financial point of view. Analysis is usually limited to the adequacy
of the consideration, not the merits of the transaction. Therefore, a
fairness opinion is not an assurance that the highest possible price was
obtained or the best deal was assumed.
A fairness opinion is a statement from a financial
expert that a transaction is "fair from a financial point of view"
to certain parties at interest. In theory, such opinions should protect
minority shareholders that cannot have a direct voice in transactions.
Fairness opinions serve two purposes: 1) to assist and justify the decision
making of directors and 2) to persuade shareholders to tender shares or
to agree to approve the terms of a merger.
Candidates The best candidates for this service could be
virtually anyone contemplating a potential future financial exchange.
Common candidates that would be interested in such a service would be
directors, shareholders, investors, trustees and special committees.
Officers, directors and majority shareholders
of a corporation owe a fiduciary responsibility to minority shareholders.
When such fiduciaries participate, either through equity in or employment
agreements, with a potential buyer, the transaction may very well be the
subject of intense scrutiny under continually developing "fairness"
standards. Dissident minority shareholders may seek injunctive relief,
rescission, damages or a statutory appraisal, and may allege the transaction
involves inadequate disclosure, breach of duty or even fraud. Obviously,
inadequate preparation to defend against dissident shareholder actions
may be perilously costly.
Benefits Fairness opinions are used to help fiduciaries
make decisions affecting the financial interests of others, and protect
them in the event a transaction is challenged. An independent fairness
opinion assures boards of directors, shareholders, trustees, courts and
others that the price paid in a corporate transaction is fair.
Fairness opinions are generally not required,
but have evolved from state corporate laws requiring boards of directors
to approve the transactions affecting shareholders and express their views
on fairness. An independent opinion will help the board satisfy its obligation
to exercise sound business judgment in approving transactions.
A Solvency Review is an in depth analysis of the asset and debt structure
of an individual or an entity to determine if the subject party or entity
is financially solvent (i.e.: assets exceed liabilities). Solvency tests
are often required when assets are transferred to Limited Partnerships,
or by lenders.
The independent status of an appraiser is valuable
in rendering solvency reviews. Corporate mergers, acquisitions, sales
and refinancing are subject to the scrutiny of lenders, stockholders,
regulators, courts and the IRS.
Candidates Any company proposing a financial transaction
requiring debt financing.
Benefits for the Company Solvency reviews confirm that
a company remains solvent after an acquisition, merger or other corporate
transaction requiring debt financing. Should bankruptcy occur later, an
independent solvency review by American Appraisal can protect secured
lenders, boards of directors and advisors from liability in fraudulent
Three Tests Performed for Solvency Review
Balance Sheet Test The fair value and present fair value
of a companys assets exceeds its stated and identified contingent
Cash Flow Test After the proposed transaction, the company
would be able to pay its debts, including identified contingent liabilities,
as they mature.
Reasonable Capital Test The capital remaining in the company
would be a reasonable amount for the business in which it is engaged and
proposes to be engaged.
Fairness/Solvency Document Download
Solvency Review Info and Document Checklist
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