Fairness Opinions/Solvency Review
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 conveyance claims.
Three Tests Performed for Solvency Review
Balance Sheet Test – The fair value and present fair value of a company’s assets exceeds its stated and identified contingent liabilities.
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