Boards of directors are required to ensure that the offer is fair to the company's shareholders. When the target is traded in the United States, Regulation 13e-3 requires the board of directors to disclose the details of the transaction including the share price, the historical trade prices of the share, and the company's value as an independent company and in liquidation; to file an independent opinion of the fairness of the transaction or its value (if such an opinion was solicited); and to disclose any other proposals which were made to the company. The opinion is prepared from the point of view of a sale of control of the company, i.e., the valuation used for the opinion is based on the assumption that control of the company is transferred. This viewpoint is important when the minority shareholders could be prejudiced by the transaction. The opinion should also take into account the likelihood that alternative offers will be made to the company by other investors, i.e., a valuation in the case of other strategic investors and the likelihood that such offers will materialize.
The fairness opinion is an important tool in the hands of boards of directors of companies when approving a deal or recommending its approval to shareholders. Such an opinion is also required under the case law of many states (including Delaware) within the duty of care imposed on the target's board of directors.
The fairness opinion submitted to the company's board of directors examines the fairness of the terms of the transaction to the company's shareholders. Consequently, the opinion compares the terms of the deal to the fair value of the company soliciting the opinion. In most cases requiring the shareholders' approval, separate opinions are prepared for both parties to the transaction.
The fairness opinion also includes a valuation which relies on methods such as those reviewed in Chapter 9. In most cases, several alternative methods of valuation are used and compared. However, it is important to note that the fact that the shareholders receive a value higher than the company's fair market value does not necessarily render the offer fair to them. A possible source of unfairness is, for example, when the shareholders receive a lower price than that received by other shareholders, such as the company's managers, for their shares.
Despite the vast professionalism of reputable entities which provide advisory services for transactions (for example, investment bankers), and despite the separation of authorities between the various departments of such advisory entities, an issue of conflict of interests may arise in some cases, and the opinion may be solicited from independent outside advisers.