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Fairness Opinions: Common Errors and Omissions
Fairness opinions almost always involve an assessment of the value of a company. The question in most fairness opinions is whether a merger or acquisition offer is within an objectively determined range of values for the company or for its shares. In evaluating the fairness of an offer, the analyst is required by law to use valuation methods that are generally accepted. The analyst providing a fairness opinion must expect that the opinion will be scrutinized by the parties to whom it is addressed and will perhaps even be tested in the crucible of litigation. This chapter discusses numerous issues and problems in fairness opinions and valuations, ranging from simple mathematical errors to methodological flaws to broad conceptual issues. Errors that can be laid at the door of the analyst include (I) misinterpretation or misuse of data, (2) failure to recognize mathematical inconsistencies in the data used, and (3) misapplication of generally accepted methods. Some errors, however, derive from flaws in methodologies that have been generally accepted by investment bankers and valuation practitioners. Since analytical methods continue to evolve, it is necessary to be aware of current thinking, to recognize the strengths and weaknesses of various approaches, and to understand when traditional methods need to be reexamined. When an approach is flawed, these flaws should be recognized and corrected. When a concept or method is demonstrably incorrect, either statistically or conceptually, it should be rejected. This chapter points out several areas in which widely used approaches to valuation and to determining fairness should be subjected to critical examination. Some of the broader issues that this chapter will examine include the scope of fairness opinions, the updating of fairness opinions, and the relationship between fairness opinions and the fiduciary duties of directors and control parties. Corporate directors should examine not only the financial aspects of fairness, but also the nonfinancial aspects. In addition, both corporate directors and analysts should also give greater attention to the question of when it is appropriate to update fairness opinions.