Fairness Solv. Opinions

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email: david@myaacg.com
 
David Hahn, CVA, ASA, MAFF, CM&AA, CCIM, MBA

FAIRNESS OPINION



A “Fairness Opinion” is a detailed valuation of a company that’s being sold or a valuation of the company that the client is buying.

Right before a deal is announced, the valuer that prepares the Opinion presents it to the Board of Directors and concludes whether or not the deal is “fair” based on the purchase price and deal structure.

While they’re not technically required by law, Fairness Opinions almost always get issued for deals that involve the sale of public companies due to lawsuits: no matter how much a company sells for, someone is bound to sue them.

Even if the company is worth $100 million and it gets sold for $1 billion, some random shareholder with too much time on his hands will argue that it should have been sold for $10 billion and will start a class-action lawsuit.

The valuer’s Fairness Opinion is filed along with all the other documents related to the transaction and serves as evidence when lawsuits start arriving.

Fairness Opinions might also be issued when:

  1. There’s a management buyout or take-private (a PE firm acquires the company via a leveraged buyout and turns it private).
  2. A public company divests one of its divisions.
  3. There’s a bankruptcy, liquidation, restructuring scenaro.
  4. There’s a hostile takeover – in this case it would be called an “inadequacy opinion” instead and would be used to defend the target by claiming that the offer is not fair.



SOLVENCY OPINION

A solvency opinion is a brief letter typically from a financial advisor to a company’s Board of Directors, stating that, after giving effect to a speicific proposed transaction, the company will be solvent, according to the following test:

Solvency Tests

The fair saleable value of the company’s assets exceeds its liabilities, including all contingent liabilities
identified by the company;

The company would be left with a reasonable amount of capital for the operations of the business in which
it is engaged;

The company, through cash generated from operations, refinancing of its debt, liquidation of assets, or
other means, would be able to pay its stated liabilities, including identified contingent liabilities, as they mature; and

The fair saleable value of the company’s assets exceeds its liabilities, including all contingent liabilities, by an amount that is greater than its stated capital amount (pursuant to Section 154 of the Delaware General Corporation law).


When is a Solvency Opinion Needed?

Public/private company LBOs

Corporate spin-offs

Leveraged recapitalizations

Dividend recapitalizations

Historically, purchaser (in case of LBO) or company (in case of dividend/recapitalization) obtains an opinion upon request of secured lender.

A solvency analysis encompasses valuation and cash flow tests to determine whether the aforementioned solvency tests are met.

Balance Sheet TestPerform a valuation to estimate fair saleable value for the subject company. Deduct the stated value of the subject company's liabilities, including all contingent liabilities identified to us by the company.

Analyze the “equity cushion” or the amount by which the assets exceed the liabilities, to determine whether the
company would be left with a reasonable amount of capital for the operations of the business in which it is engaged.
Determine if the transaction has impaired the capital of the company.

Capital Adequacy TestAs part of the analyses developed for the balance sheet test, we analyze the “equity cushion” or the amount by which the assets exceed the liabilities following the proposed transaction, to determine whether the company would be left with a reasonable amount of capital for the operation of the businesses in which it is engaged. We Also determine whether the indicated “equity cushion” exceeds the aggregate par value of the company’s issued capital stock. This is known as the “Delaware Surplus Test.”

 

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