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A fairness opinion is a statement on a proposed financial transaction involving a public company which indicates whether or not the terms of the transaction are reasonable. Such opinions are solicited from third parties in the interests of protecting shareholders. The third party which offers the opinion is often an investment bank, and it charges a fee for the service of providing a fairness opinion.
When a company is publicly traded, the members of the board are charged with fiduciary duty to the shareholders. This means that they must make sound financial choices while they are in charge of the company. The interests of shareholders are the most important factor, and officials cannot take steps which would lead to a devaluation of shares. Receiving a fairness opinion in advance of a proposed transaction allows company officials to fulfill their fiduciary duty by confirming that a transaction will benefit the company and, by extension, the stockholders.
While not required, fairness opinions are extremely common for transactions like mergers, takeovers, going private, and spinoffs. Company officials may use the statement to cover themselves so that, in the event that a transaction is challenged, they can point to the fairness opinion to show that they acted reasonably. The document can also be useful in negotiations; if it reveals that stock is not valued fairly, for example, this can be used to renegotiate the terms of the deal to ensure that it will go through.
To prepare a fairness opinion, the third party needs access to the facts which surround the deal. The opinion is only as good as the information provided. If the company obscures data, fails to disclose key details, or falsifies information, the fairness opinion cannot compensate for this and will be erroneous. It is also important to note that this professional opinion can potentially come from a party with a conflict of interest in the transaction. In some regions, disclosing such conflicts is required, while in others it is not.
Shareholders can use a fairness opinion to evaluate a proposed transaction to determine whether or not their interests are being protected and represented by company officials. If shareholders feel that they are not being given due consideration in the deal, they can file suit against the company and its representatives. Such suits may force companies to complete or abandon transactions for the benefit of the shareholders. They can also result in compensation payouts.