COMMENTARY · FAIRNESS OPINIONS
Fairness opinion: timing, scope, and what it is not.
Independent directors and fiduciary administrators turn to fairness opinions with growing frequency. There is recurring confusion about what this opinion covers.
COMMENTARY · FAIRNESS OPINIONS
Independent directors and fiduciary administrators turn to fairness opinions with growing frequency. There is recurring confusion about what this opinion covers.
Fairness opinion is one of the most requested products of recent times. Independent committees of listed companies, fiduciary administrators of investment funds, boards in CVM operations with related parties: all turning to fairness opinions to substantiate sensitive decisions.
But there is recurring confusion about what this opinion covers and, mainly, about the realistic timeframe for its execution.
A fairness opinion is an independent professional opinion about whether the financial terms of a specific transaction are fair from the financial point of view to a determined party (acquired company's shareholders, fund quotaholders, etc).
It opines on a transaction price, on a share exchange ratio, on accounting capacity. It is technical opinion, not investment recommendation, not regulatory approval, not endorsement of fiduciary directors' decision.
A fairness opinion does not, importantly:
It does not opine on commercial merit of the transaction. The opinion may conclude that the price is fair and the transaction may, even so, be a bad commercial decision.
It does not substitute board responsibility. The independent committee that uses fairness opinion as basis still answers for its decision. The opinion is one element of decision support, not the final word.
It is not exhaustive due diligence. The opinion is based on information provided by the parties and, in general, does not include independent verification of complete operational, legal or tax aspects of the target. Audit and legal due diligence are separate works.
It is not insurance against subsequent loss. If the company is acquired by R$ 100 million with fairness opinion and goes bankrupt in two years, the opinion is not invalidated. It opined on conditions on the data-base.
Conducting a fairness opinion well requires time. Reasonable timing, when there is no specific complication, sits between four and eight weeks, depending on complexity of the transaction and quality of available information.
Trying to compress a fairness opinion to one week is the recurring origin of poorly substantiated reports. The committee that demands one-week fairness opinion is, in practice, asking for opinion-on-demand, not independent fairness opinion.
"The value of the fairness opinion lies in its independence and methodological rigor. Compressing the timeline to satisfy unrelated commercial timing erodes precisely the attribute that justifies its contracting."
In situations of genuine timing pressure (transaction with regulatory deadline, intra-group operation with closing date), best practice is to engage the appraiser earlier in the process, with shared timing visibility, instead of compressing the work into impossible window.
The appraiser who accepts impossible timing is, very probably, the appraiser who will produce report that does not withstand subsequent scrutiny.