Fairness Opinions: Q&A from an ESOP Perspective
Excerpted from Mercer Capital's forthcoming book, "Is It Fair? A Guide to Understanding Fairness Opinions from a Valuation Perspective."
The following question and answer format allows readers to focus on material of specific interest. Additional must-read materials related to your questions about fairness opinions and other ESOP oriented topics are included in the forthcoming book, "Is it Fair? A Guide to Understanding Fairness Opinions from a Valuation Perspective," and on the Mercer Capital website (www.mercercapital.com) where an ongoing dialog of ESOP questions and answers can be found in our quarterly valuation periodicals and archived articles. In our experience as financial advisors to ESOP trustees, and as an ESOP-owned company, every ESOP situation usually has unique circumstances that require specific assessment. For a confidential discussion about your specific ESOP situation, please contact a Mercer Capital valuation professional.
Q: WHY ARE FAIRNESS OPINIONS IMPORTANT?
A: Prepared by an independent financial advisor, a fairness opinion is just that- an opinion that a proposed transaction is fair (or not) from a financial point of view, to shareholders of a company. A fairness opinion can assist corporate directors and executives in making decisions concerning strategic and financial events. A fairness opinion can also instill confidence among stakeholders that an action has been thoroughly vetted for its effects on the ESOP and/or the sponsoring company. These opinions can aid in substantiating that decision makers have adhered to the business judgment rule, which requires that a board exercise due care in the process of reaching a corporate decision, that the board acts independently and objectively in reaching such decisions, that decisions are made in good faith, and that there was no abuse of discretion in making the decision.
Q: DOES A TRANSACTION INVOLVING OR AFFECTING AN ESOP REQUIRE A FAIRNESS OPINION?
A: The prudent, albeit self-serving, answer is yes. Despite this author's professional convictions that transactions affecting or potentially affecting an ESOP should include a fairness opinion, such opinions are rare. Some business owners and trustees believe that fairness opinions are time-consuming, costly, uncommon, unnecessary, or excessive for many transactions. Perhaps, in some circumstances, a fairness opinion could be viewed as nonessential. However, every ESOP installation and every ESOP termination, and virtually every significant corporate (or strategic) event in an ESOP sponsoring company would be better served to include a fairness opinion rendered from the financial perspective of the ESOP and its trustee.