Fairness Opinions in M&A: Strategic Value and Legal Risk Mitigation

Key Takeaways

• A Fairness Opinion is an independent financial check that validates whether deal terms are financially fair to a defined stakeholder group.
• It strengthens governance and documents sound decision-making under the business judgment rule.
• It helps mitigate legal exposure, especially in light of cases like Smith v. Van Gorkom (1985).
• For complex or conflict-prone transactions, it has become a strategic necessity.

The Strategic Value of Fairness Opinions in M&A and Corporate Transactions

Fairness opinions have been a foundational element of high-quality M&A advisory, corporate governance, and legal risk mitigation for more than 35 years. Their importance surged after the Smith v. Van Gorkom (1985) decision, where the Delaware Supreme Court held directors personally liable for approving a sale without adequate financial diligence. As Harvard Law School Forum on Corporate Governance points out, fairness opinions have become indispensable tools for investment bankers, corporate attorneys, and boards seeking to validate transaction terms and withstand regulatory or shareholder scrutiny.

As deal complexity grows, particularly involving private equity, secondary transactions, and rollovers, the need for independent financial opinions continues to increase across both public and private markets. Recent SEC rulemaking for private fund advisers, for example, explicitly required fairness or valuation opinions in adviser-led secondary transactions as part of a broader investor-protection framework.

What Is a Fairness Opinion and Why Does It Matter?

A fairness opinion is an independent financial assessment, typically issued by an investment bank or valuation advisor, stating whether the consideration offered in a proposed transaction is fair from a financial point of view to a defined stakeholder group.

For boards of directors, special committees, legal counsel, and M&A advisors, fairness opinions provide:

• Independent valuation support grounded in market data, financial modeling, and scenario analysis
• Documentation of a well-informed decision-making process, essential to the business judgment rule
• Risk mitigation against shareholder litigation and claims of conflicts of interest
• Greater transparency in transactions involving management, controlling shareholders, or fund sponsors

Fairness opinions do not recommend how shareholders should vote, nor do they address tax, regulatory, or legal matters, they strictly validate financial fairness.

Increasing Adoption in Private Company M&A

While fairness opinions are standard practice in public company transactions due to SEC disclosure expectations, their relevance in private company deals has expanded sharply. Private company boards share the same fiduciary obligations as public boards but often operate with fewer layers of oversight and more potential for conflicts.

Investment bankers and attorneys increasingly recommend fairness opinions for private transactions involving:

• Complex capital structures
• Private equity sponsors
• Minority shareholders
• Management buyouts (MBOs)
• Related-party negotiations

In these contexts, a fairness opinion strengthens governance processes and provides defensible, third-party assurance to all stakeholders.

Transactions That Commonly Require Fairness Opinions

Fairness opinions are routinely obtained in transactions that involve valuation uncertainty, conflict potential, or significant impact on shareholder value. Typical examples include:

Mergers & Acquisitions 
Validates pricing, exchange ratios, and financial consideration in transformative M&A deals.

Management Buyouts (MBOs)
Essential when acquirers have inside information or influence over the transaction structure.

Recapitalizations & Restructurings
Supports boards evaluating capital structure changes, debt-for-equity swaps, or balance sheet adjustments.

Employee Stock Ownership Plans (ESOPs)
Often required for ESOP formation, restructuring, or share repurchase transactions. Recent Department of Labor proposals on "adequate consideration" for ESOP stock emphasize fair market value, independence of the valuation adviser, and a documented good-faith determination of value.

Related-Party or Conflict-Driven Transactions
Provides independent analysis when insiders, controlling shareholders, or sponsors are involved.

Bankruptcy or Liquidation Scenarios
Ensures that asset sales, reorganizations, or distributions reflect fair value.

GP-Led Secondary Transactions
Offers objective valuation in continuation fund processes, investor rollovers, or tender options.

Across all these situations, fairness opinions reinforce process integrity and act as a critical safeguard for both directors and advisors.

When Boards, Attorneys, and Advisors Should Obtain a Fairness Opinion

Fairness opinions are strongly recommended when:

• A transaction involves a change-of-control
• There are conflicts of interest or asymmetric information among stakeholders
• Management, private equity sponsors, or insiders participate in the deal
• Shareholder approval is required, especially in contentious or high-stakes transactions
• The deal involves cash-out or rollover options, triggering heightened SEC attention
• Litigation risk is elevated, particularly for public companies

For attorneys, fairness opinions help demonstrate that the board satisfied its duty of care. For investment bankers, they offer an opportunity to provide objective market-based analysis and support overall transaction defensibility.

Why Fairness Opinions Remain Essential: Lessons from Smith v. Van Gorkom

The Smith v. Van Gorkom ruling reshaped the legal landscape for corporate boards. The Delaware Supreme Court’s decision made clear that directors must rely on independent financial analysis, not solely on management presentations or internal assumptions.

This case established a lasting precedent:

• Boards must demonstrate informed, reasonable decision-making.
• Independent financial opinions are essential evidence of diligence.
• Proper documentation reduces the likelihood of successful shareholder claims.

Today, fairness opinions serve as both an evaluation mechanism and a defensive document that strengthens the governance record in any transaction process.

Frequently Asked Questions (FAQ) on Fairness Opinions

Q: What is a fairness opinion?
A: A fairness opinion is an independent financial assessment, typically issued by an investment bank or valuation advisor, stating whether the consideration offered in a proposed transaction is fair from a financial point of view to a defined stakeholder group.

Q: How does a fairness opinion relate to the underlying valuation?
A: A fairness opinion relies on robust financial modeling, market data, and scenario analysis to provide fairness opinion valuation support. While it is grounded in valuation work, its ultimate conclusion is about the fairness of the consideration to shareholders, not merely a single calculation of value.

Q: Are fairness opinions only relevant for public company M&A?
A: While standard practice in public markets, the relevance of fairness opinion M&A has expanded sharply in private markets. They are increasingly recommended for fairness opinion private company deals involving complex capital structures, private equity sponsors, or related-party negotiations to strengthen governance and mitigate conflicts.

Q: When is a fairness opinion typically required for an ESOP transaction?
A: A fairness opinion ESOP is often required for the formation, restructuring, or share repurchase transactions of an Employee Stock Ownership Plan. This is to ensure "adequate consideration" and reinforce a documented good-faith determination of fair market value, as emphasized by Department of Labor proposals.

Q: What is the difference between a simple valuation and a fairness opinion?
A: A simple valuation determines a range of value for a security or company. A fairness opinion, however, is a specific conclusion stating that the transaction consideration is fair from a financial point of view to a specified party. This distinction is critical in M&A governance.

Q: Does a fairness opinion substitute for legal or tax advice?
A: No. The opinion strictly validates financial fairness and is not intended to address tax, regulatory, or legal matters, which require separate counsel.

A Strategic Imperative for Professionals

For investment bankers, a fairness opinion is a critical tool that enhances deal credibility and reduces execution risk.

"For investment bankers, a fairness opinion is a critical tool that enhances deal credibility and reduces execution risk."

— Paul Vogt, Leader of Valuation Practice

For corporate attorneys, it serves as a protective layer that supports fiduciary duty compliance and mitigates litigation exposure.
For boards of directors, it provides an independent, defensible assessment that supports sound judgment and transparent governance.

As M&A activity grows more complex, particularly in private markets and sponsor-driven deals, the role of fairness opinions will continue to expand. In today’s regulatory and legal environment, they are not merely a best practice; they are a strategic necessity.

Paul Vogt

Paul Vogt is a Managing Director at PCE and leads the firm’s valuation practice from its Atlanta office. With over 20 years of experience, he specializes in business valuations for financial reporting, tax planning, litigation support, and corporate strategy across a wide range of industries.

Read Paul's Full Bio