The events of the recent years have shown that the need for transparency in merger and acquisition processes is becoming increasingly visible. The corporate governance and the question of respect for minority shareholders is becoming more important, for which so strongly fights e.g. the Association of Individual Investors. An additional responsibility for decisions and a greater communication with all stakeholders has been required from the boards od directors. All of this results in a greater importance of Fairness Opinion prepared by a specialized consulting company.
Fairness opinion as a tool of corporate governance is known mainly from the Anglo-Saxon countries, where such an opinion is required by some regulations. In practice, however, countries with a developed capital market use this tool more often than is required by the regulations, providing stakeholders with two or even three independent reviews. Such a practice is not only helpful in the communication between the company (the Board) and an investor. It also builds the image of a responsible company, but at the same time constitutes a strong argument, when an attempt of a hostile takeover occurs, for example. In Poland the use of the Fairness Opinion takes place mainly in the case of tender offer for shares pursuant to article 80 item 1 of the Public Offer of Financial Instruments Act. However, this is not a requirement (which stems from the item 3 of this article), what caused “the impressive sum” of 17 fairness opinions drawn up in the years 2009-2013 on behalf of the boards of public companies in Poland. Of course, this number does not include the amount of opinion drawn up for private companies, but judging from the scale on the stock exchange, it is easily noticeable that it does not constitute a staggering number.
What is this?
Fairness Opinion is an independent opinion of a specialised advisory firm concerning the financial aspects of the transaction. The purpose of the study is to determine and judge, whether the proposed financial conditions of the transaction are defined according to market standards. In the Polish market practice it has been accepted that the Fairness Opinion is only an expression of opinion about the proposed price in the form of a letter to the Board of Directors. In both the United Kingdom and the United States such factors as initial risk analysis, the structure of the transaction, the potential conflicts or schedule are taken into consideration. This appears to be justified, since in many cases of failed transactions is was not a high price that was the reason for the disaster. Fairness Opinion, however, does not contain answers to the questions “which price is better”, or “whether there are legal risks connected to the concentration”, for example. In addition, the consulting company has usually not much time to prepare a document which results in the lack of the due diligence test, thus the opinion is based only on the provided materials.
When is it useful?
In addition to the aforementioned tender offer for shares, the Fairness Opinion is recommended in the following cases:
- Hostile takeover attempts,
- Transactions that have strategic importance for business,
- Transactions that raise controversy especially among minority shareholders,
- The sale of key assets of the company,
- Leveraged buyouts,
- An offer made by several competitors.
On the one hand, the opinion should be a protection for the Board and, on the other hand, the reasurrance for all stakeholders that the proposed financial conditions are marked-based. Private companies order a fairness opinion in the case of a business sale or as a check of the valuation performed by another entity (without bearing double cost).
Will it become popular?
In my opinion, Fairness Opinion is one of the most underrated tools on the Polish capital market. It increases the security of the Management Board, it is an argument in the transactional process, supports the communication with investors and helps them better understand the transaction. The development of corporate governance principles allows you to believe that it will soon become more popular and required by stakeholders. Certainly, an introduction of legal requirements for an external opinion on public tender offers for shares would be helpful.
Member of the Board of Directors, Mergers and Acquisitions Department