Fairness Opinions

About Fairness Opinions

Fairness opinions have two purposes. The first is to provide Directors with information to assist them in making financial decisions. In addition, fairness opinions serve as factual evidence in litigation in order to demonstrate that Directors used reasonable business judgment in making a decision on behalf of shareholders.

Importance Of Fairness Opinions In Litigation

A central issue in litigation against Boards of Directors is whether informed business judgment was used when considering a proposed transaction. Directors who had relied primarily on information provided by officers of the company and had received no advice from independent advisors were held liable by the Delaware Supreme Court for approving a merger cashing out minority stockholders. The merger price was at a substantial premium over market, and the experienced and reputable Directors were not charged with malice. Nevertheless, they were held liable for damages to the minority shareholders. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). Investment bankers’ fairness opinions provide evidence of Directors’ compliance with their fiduciary obligations. Numerous subsequent decisions in Delaware and elsewhere have confirmed that obtaining an independent fairness opinion can help to demonstrate that Directors have used reasonable business judgment.

Sutter’s Expertise In Fairness Opinions

Our principals have extensive experience in rendering fairness opinions to Boards of Directors (and Special Committees) in going-private transactions, as well as in other merger and acquisition transactions and restructurings. Sutter’s principals have been responsible for fairness opinions more than a thousand transactions over a period of more than 30 years. All of these transactions that have been challenged in litigation have been successfully defended. Our experience in expert testimony is an important adjunct to our opinion services. We have been involved in numerous cases either in defending or in challenging fairness opinions issued by others. This experience in litigation support enables us to review and to critique the methodologies employed, and to understand the strengths and flaws of various approaches.

Our Approach To Fairness Opinions: What Sets Sutter Apart

Sutter holds itself to high standards in rendering fairness opinions.

We opine as to the fairness, from a financial point of view, of the entire transaction, rather than limiting our opinion solely to the fairness of the consideration.

We update our opinion letters prior to the mailing of proxy statements.

We take into account the price which, in our judgment, would be awarded in an appraisal action under the relevant state law.

A fairness opinion should take into account the entire context of the transaction and weigh all relevant factors. Structural fairness should be considered, particularly the relative consideration received by the various parties. Our policy is to opine as to the fairness of the transaction as a whole to the shareholders for whom the opinion was requested. The importance of examining the entire context of the transaction was illustrated in a Delaware Supreme Court decision. A transaction was deemed unfair even though the majority shareholder and the minority public shareholders received identical cash consideration per share; the Directors had failed to determine the value of the company as a going concern, and the majority shareholder had restricted bidders by limiting them to an all-cash deal. McMullin v. Beran, 765 A.2d 910 (Del. 2000).

In addition to protecting Directors, a fairness opinion should also provide timely guidance to shareholders. An updated opinion enables shareholders to base their decisions on current information. An updated opinion is also helpful to Directors. In a case where the Directors did not obtain an updated fairness opinion in a transaction that closed several months after a shareholder vote, the Delaware Supreme Court held that the burden of proof as to fairness had shifted to the Directors. Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001).

Financial fairness in a proposed transaction depends on the amount that dissenting shareholders would likely receive in a statutory appraisal. The applicability of certain discounts in a statutory appraisal varies from state to state. The Delaware Supreme Court has held that neither minority discounts nor discounts for lack of marketability are relevant in appraisal actions. Cavalier Oil Corp. v. Harnett, 564 A.2d 1137 (Del. 1989). The Delaware Court of Chancery has ruled that Directors have a fiduciary duty to pay shareholders who are cashed out the fair value of their stock as that term is defined in appraisal cases. Metropolitan Life Insurance Co. v. Aramark Corp., Del. Ch. C.A. 16142 (Del. Ch. 1998). Based on this standard, Sutter takes into account the price which, in our judgment, would be awarded in an appraisal under relevant state law, whether or not the structure of the transaction permits shareholders to avail themselves of the appraisal remedy.