Valuing your company

Fairness opinions make good business sense

Compared with other types of businesses, both privately and publicly held, family-owned businesses present a unique set of challenges and opportunities. For example, when it comes to selling or merging a family business-both considered major “change of control” transactions-avoiding disputes or rifts among board members or shareholders after the sale or merger is key.

To accomplish this, an often overlooked risk-management tool, known as a fairness opinion, can help, says Jeffrey M. Gordon, CFA, a managing director at Chicago-based Duff & Phelps L.L.C., where he specializes in financial advisory engagements involving mergers and acquisitions, fairness and solvency opinions, and business and estate planning.

“A fairness opinion affirms that the merger or sale transaction is financially fair to the company’s shareholders,” says Gordon. “Bolstered by a fairness opinion, the company’s management and board of directors will be better able to make an informed decision about a change-of-control transaction, and, it is hoped, avoid disaster down the road. Fairness opinions are a fact of life in deals involving public companies, but there are often compelling reasons for family-owned businesses to obtain them as well.”

Directors of public and private corporations, as fiduciaries, can be held personally liable for the consequences of their actions. They cannot act for their own benefit but must act for the benefit of their companies.

“If a third party can objectively affirm that the directors’ choices are sound,” says Gordon, “it can protect them from claims to the contrary.”

The sharply rising level of merger and acquisition activity over the past several decades has put the choices that directors make about their companies under increasing scrutiny, according to Gordon. In a nutshell, the government wants to make sure directors are being fair and not acting from personal interest. The development of Securities and Exchange Commission regulations and key court decisions, especially in the 1980s, highlighted the need for boards of public companies to make informed decisions using the business judgment rule. Essentially, boards had to exercise due care, act in good faith and in a disinterested manner, and not abuse their discretionary position.

These requirements have led boards to hire financial advisors to act as independent third parties to assist in the decision-making process and provide evidence that the board has complied with the business judgment rule. The fairness opinion has become the universally accepted instrument used to effectively prove such compliance.

Why are the boards of family-owned companies increasingly emulating their public counterparts and obtaining fairness opinions when considering merger or sale transactions? There are two major reasons. First is avoiding family disputes. “It’s not uncommon for disagreements about important decisions to arise due to lack of trust or jealousy among family members-especially those in management versus those outside the company, or those with significantly different ownership levels,” says Gordon. “Second, fewer outside board members means a dearth of independent expertise in evaluating a transaction’s fairness.”

These factors increase the risk that a transaction may be challenged by dissenting minority shareholders during the sensitive pre-closing phase of a transaction, where the lack of a

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