A board can negotiate a premium over yesterday's share price and still need evidence that shareholders are receiving fair value.
Your client board needs a financial basis for evaluating a proposed transaction. A fairness opinion is a professional judgment about whether specified transaction consideration is fair, from a financial point of view, to an identified constituency. Consideration means the cash, securities or other value exchanged.
As the financial advisor, the investment bank engaged to provide transaction advice, you evaluate the economic terms within the engagement's scope. The board decides whether to pursue the transaction. A favorable opinion does not establish that the board obtained the highest possible price.
When determining whether a fairness opinion is necessary, start with the board's decision, potential conflicts and available financial evidence. Counsel evaluates applicable law and transaction documents.
The Financial Industry Regulatory Authority (FINRA) regulates member firms such as yours, and its Rule 5150 sets disclosure and approval requirements for a member's fairness opinion.
Common mistakes
- Treating an 18-month-old paid relationship as irrelevant because another team handled it. The two-year relationship inquiry reaches the firm.
- Assuming a committee with two deal-team members and one qualified outside member necessarily fails. FINRA requires participation in review and approval outside the deal team, not an entirely separate membership.
- Dividing $320 million of enterprise value by 10 million shares and reporting $32 as equity value. Complete the debt-and-cash bridge first.
Bottom line
- Rule 5150 does not require a fairness opinion for every transaction.
- Every member issuing an opinion needs written approval procedures.
- A fairness committee, when used, must include review and approval outside the deal team.
- Rule 5150(a) applies when the firm knows or has reason to know its opinion will reach public shareholders directly or through description.
Exam shortcut
Start by identifying the actor: the investment bank, its internal fairness committee, the client's special committee or the filing person. Assign the stated duty before evaluating choices. Circle “public shareholders” and “described” to spot the letter-disclosure trigger. Then check whether an answer improperly limits written procedures to public transactions. For valuation questions, label the starting number EV or equity value.
The full lesson (about 3,432 words, 23 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C24
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