Distressed investing — Step 5: Close with confidence

Is the deal fair to stakeholders and investors?

At this stage, the last thing you want to see is all your hard work and investment of time and resources go for naught because the arrangement is nixed by the distressed company’s board of directors or stakeholders. A fairness report by a credible, independent party can improve the chances that your deal succeeds.

Fairness opinions are prepared by a third party for the board of directors of the distressed company to assist them in determining whether the deal is fair from a financial point of view. The report will analyze the transaction’s financial fairness from each of the stakeholders’ perspectives, taking into account various considerations, such as value exchanged in the deal and if the company will be in an improved position with better cash flow, more equipped to execute its business plan and better able to meet its debts.

Prior to approving a transaction under the Companies’ Creditors Arrangement Act (“CCAA”), the Court relies on the report of a court appointed monitor to determine the reasonableness of a transaction and the impact on creditors.  However, in restructurings under the Canada Business Corporations Act (“CBCA”) and out of court transactions, the role of a court appointed monitor does not exist and as such it is important that stakeholders obtain a fairness opinion to mitigate the risk of the transaction being challenged.

While fairness opinions are generally commissioned by the distressed company, it’s in the investor’s best interest to openly participate, providing any necessary information to the fairness opinion provider.

Recent history has shown that courts may reject fairness opinions that fail to fully disclose all the key information or that are crafted by a party that has a vested interest in seeing the deal go through. In 2016, Exxon Mobil’s takeover attempt of InterOil Corp. was struck down by the Yukon Court of Appeal because the fairness opinion was found to contain too little information.

Clearly, all fairness opinions are not created equal. Here’s what both parties in the transaction should know about fairness opinions:

• An independent provider will add value to the fairness opinion report by delivering it without the conflict of interest of earning a success fee if the transaction is completed, which is generally the case when the financial adviser on the deal provides the fairness opinion. This arm’s-length approach can be more credible in the eyes of the courts and boards of directors that rely on this fairness opinion to make a sound business decision.

• Reports should include sufficient disclosure to let stakeholders understand how that fairness opinion provider developed its opinions, allowing them to make a more informed decision.

In a complex restructuring, many stakeholders can be impacted. It’s a fine balance to negotiate and complete a deal that’s fair to all parties from a financial point of view. Once this is achieved, a fairness opinion, addressing fairness to each of the stakeholders can help a board of directors recommend and approve a deal. This in turn may sway stakeholders to vote for a deal.

While there are no guarantees a fairness opinion is going to push your deal through, it can be very beneficial by identifying red flags early in the process to help make changes before it’s too late. Preparation for a fairness opinion is an interactive process, so it’s in your best interest to participate given that it can help increase the likelihood your deal will close.