The purveyor of a fairness opinion must be cognizant of what the U.S. Securities and Exchange Commission (SEC) may challenge. Typically, the SEC focuses on several core issues when reviewing fairness opinions in mergers, acquisitions, and other financial transactions. While the SEC doesn’t mandate fairness opinions, they assess disclosures related to fairness opinions to ensure transparency and investor protection. The primary issues the SEC reviews are as follows:
- Disclosure of Financial Analysis and Methodology
- The SEC expects clear disclosure on the methodology used by the financial advisor to determine fairness, including comparable company analysis, precedent transactions, discounted cash flow (DCF) analysis, and other valuation methods.
- They assess whether investors can understand the rationale and basis of the fairness opinion through these disclosures.
- Conflicts of Interest
- Disclosing any conflicts of interest is critical. This includes financial incentives, previous engagements, or relationships between the financial advisor and the parties involved in the transaction.
- SEC scrutiny often includes fees tied to transaction completion, which may incentivize biased recommendations, as well as any ties to directors or major shareholders.
- Independence and Objectivity of the Financial Advisor
- SEC looks into the degree of independence of the advisor providing the fairness opinion, especially when there are affiliations between the advisor and transaction parties.
- In some cases, the SEC may scrutinize the board’s process for selecting and supervising the advisor to ensure fair representation of shareholders’ interests.
- Assumptions and Projections Used
- They evaluate the assumptions underlying the financial analysis, such as growth rates, discount rates, or future cash flow.
- The SEC usually requires companies to disclose whether the financial advisor relied on company-provided projections and if any adjustments were made to these projections.
- Opinion’s Scope and Limitations
- Fairness opinions often have disclaimers or limitations; the SEC reviews these to ensure they’re appropriately disclosed, especially regarding scope, reliance on certain data, or limitations or use.
- Board’s Reliance on the Fairness Opinion
- SEC reviews board actions and disclosures to ensure that the board made an informed decision and understands the opinion’s role in the transaction, rather than relying on it as the sole basis for their decision.
- Material Financial Terms of the Transaction
- Fairness opinions should address whether the financial terms are fair from a financial perspective. The SEC often looks at whether the opinion sufficiently addresses this and considers factors like stock prices, premiums, and multipliers compared to market norms.