When evaluating whether the financial terms of a deal are fair, get an independent, third-party perspective.
Can you make a deal acting in good faith and still be sued? Unfortunately, yes. Good intentions, without proper due diligence and risk management may result in legal headaches and potential financial liability. The landmark case Smith v. Van Gorkom, often called the “Trans Union Case,” (488 A. 2d 858, Del. 1985), which effectively made the issuance of fairness opinions a requirement for mergers and acquisitions and other significant corporate transactions, remains a cautionary tale for all.
The Trans Union Case was a class action lawsuit brought by the shareholders of a corporation seeking to repeal a cash-out merger of an existing corporation into a new corporation. Alternate relief in the form of damages was sought against members of the board, owners of the parent company of the new corporation, and the new corporation itself. Following trial and a lengthy appeal, the Supreme Court held that: (i) the board’s decision to approve the proposed cash-out merger was not the product of informed business judgment; (ii) the board acted in a grossly negligent manner in approving amendments to the merger proposal; and (iii) the board failed to disclose all material facts which they knew or should have known before securing shareholders’ approval of the merger. On motions for reargument, the court held that one director’s absence from a meeting of the board of directors at which the merger agreement and subsequent amendments were approved, did not relieve that director from personal liability. Accordingly, the case was reversed and remanded. The lower Delaware court found the board liable for breach of its fiduciary duty of care to the corporation and liable for damages to the shareholders. Such liability could have been avoided had the directors obtained an independent fairness opinion.
Deciding what is fair in a business transaction should not be a ballpark estimate or casual judgment based on intuition. In fact, a shareholder board has a fiduciary responsibility to act as a steward for shareholders by protecting and enhancing shareholder value. Pricing, deal terms and consideration received must be properly evaluated in the context of what is fair and reasonable in the market. Too much is at stake, and neither party should rely solely on the other’s representations or internal perceptions of value. The legal and financial risks are likely elevated in an economy facing inflationary concerns and looming recessionary fears. As such, it is prudent to obtain an independent, third-party fairness opinion from an organization with qualified valuation professionals.
When to engage a fairness opinion provider
Companies and shareholders should look to the assurances offered by a professional third-party, independent valuation provider in any of the following circumstances impacting minority shareholders:
- An ownership transfer, where a majority shareholder enters into an agreement to sell to an outside party or consortium of buyers.
- A recapitalization, in which one or more shareholders float new shares — which could be dilutive to minority owners.
- A merger or acquisition, undertaken by a company to grow market share by buying a competitor or embark on an industry roll-up.
- An asset sale, in which ownership seeks to divest itself of a discrete line of business with a certain independent market profile or sell non-core assets to raise cash.
In dealmaking, timing is everything. Receiving a thorough and timely response from your professional team is important. But a rapidly changing market can result in valuation “swings,” so you cannot retain a provider too early. In most circumstances — to reduce the risk of overspending — it is better to retain a firm once a transaction is underway.
You will want to engage a firm with sufficient resources and agility to meet your needs quickly, but also one experienced enough to complete due diligence and deliver quality work in a compressed timeframe. Moreover, the quality of the professionals performing the work is equally important. Ensuring that the valuation specialist and team providing a fairness opinion have the necessary professional experience, deep industry expertise and appropriate valuation capabilities are all factors that should be carefully considered when selecting a fairness opinion provider.
When the time is right, it’s time for BPM
The attestation of a qualified valuation professional allows parties in negotiations to focus on issues that matter. It helps stakeholders appreciate what factors drive the numbers — and what those numbers are — while understanding opportunities and mitigating risks. It reduces the risk that one or more shareholders can claim an asset was undervalued or overvalued after the deal has been completed. Such complaints can end in expensive legal battles, resulting in a drag on executive leadership and undermining enterprise value.
BPM has the resources to act quickly on your deal timeline. Our team has a wealth of experience providing timely, informed opinions to private and public companies. Our clients include all parties to a financial transaction — owners, minority shareholders, investors, lenders and strategic buyers — from entrepreneurial businesses to large-cap companies with sophisticated mergers and acquisitions (M&A) departments and roll-up plans. Further, BPM has seasoned valuation professionals with the necessary professional experience, industry and sector knowledge, and valuation capabilities to effectively deliver high-quality fairness opinions that can withstand scrutiny.
Whether you’re a buyer or seller, the knowledge afforded by a high-quality fairness opinion is critical. To learn more about BPM’s capabilities, contact us.
Fairness Opinion. Publication of CFI—the Corporate Finance Institute. Accessed 20 Mar 2023 here.
Springer, Matthew and Kemp Moyer. Interview with Jeff Scalzi, Tara Sudol, BPM. 9 Feb 2023.
Dispute Analysis Issues: When to Call in a Business Appraiser. Repr. of article published in Mercer Capital’s Value Added 15.1, 2003. Accessed 20 Mar 2023 here.