Fairness opinions in Poland
External, independent opinions on the fairness of the financial conditions of M&A transactions are gaining popularity in Polish practice.
Fairness opinions, a notion developed in Anglo-Saxon countries, are opinions prepared by an independent external adviser to confirm the fairness of the financial terms of mergers and acquisitions. They are generally commissioned by management in the case of transactions of strategic importance for the company. In some jurisdictions, issuance of a fairness opinion may be required by law, for example with respect to the sale of shares in public companies.
The financial crisis and the related uncertainty with respect to proper valuation of assets encouraged managers of companies from outside the Anglo-Saxon legal tradition to seek out independent valuations of shares which they could rely on, particularly because valuation is difficult and requires familiarity not only with the company’s condition but also the situation on the market and among competitors. Moreover, various methods may be used to conduct a valuation—all of them based to some extent on subjective assumptions. The motive for seeking a fairness opinion is not just to persuade the owners of the companies to accept the proposed transaction, but also to reduce the risk that the management board members could be charged with acting to the detriment of the company in deciding to carry out a deal.
Polish law also requires a company to obtain an opinion from an independent expert in connection with M&A transactions, in the form of a review of a merger or division plan under the Commercial Companies Code. However, the management boards of the companies involved in a merger or division may be released from this obligation by the shareholders.
The construction of an opinion as provided for in the Commercial Companies Code differs from the typical fairness opinion, which is obtained separately by the management of each of the companies. The Polish regulations require an independent expert to be appointed to review the merger or division plan prepared jointly by the companies participating in the process. The management boards of the companies must thus first agree on the terms of the transaction, including the share exchange ratio, and then the court appoints an independent expert to determine whether the merger plan prepared by the companies is fair and proper. However, the companies are free to commission their own separate fairness opinions. An example was the merger of Bank Zachodni WBK SA and Kredyt Bank SA. In light of the scale and significance of the merger, each bank sought its own fairness opinion—BZ WBK obtaining opinions from Deutsche Bank AG and Barclays Bank PLC, and Kredyt Bank obtaining an opinion from UBS Ltd.
In Poland, the Public Offerings Act of 29 July 2005 provides for an approach that is much closer to the Anglo-Saxon model. Under this act, in a tender offer for sale or exchange of shares, the price as a rule may not be lower than the average market price during the past six months. Because this minimum price may not reflect the true value of the shares, when there is a tender offer for the shares of a listed company, the management board of the company is required to take a position on whether it believes that the price proposed in the tender offer corresponds to the fair value of the company, and in this respect the act expressly provides that the price at which the shares have been trading on the exchange may not be the only measure of the value. In order to prepare its own position on the offer, the management board may, under Art. 80(3) of the act, seek the opinion of an external expert on the share price. An example was the opinion issued by Rothschild at the request of the management board of Polish coal company Lubelski Węgiel Bogdanka SA in connection with the much-publicised takeover attempt by New World Resources NV. The opinion found that the price proposed in the tender offer by NWR did not reflect the fair market value of Bogdanka, and the management board of Bogdanka relied on the Rothschild opinion when recommending that shareholders reject the offer.
Which valuation is correct?
When considering the increasing popularity of fairness opinions, it must be borne in mind that the same assets may be valued differently depending on the assumptions that are adopted, and the value of shares is also based on the underlying value of the tangible and intangible assets of the company. Thus it is no surprise that two different valuations may both be regarded as fair. Ultimately it is up to the management board and the shareholders to determine which valuation they regard as more correct under the circumstances.
Magdalena Kasiarz, Corporate Law, Restructuring, and Business-to-Business Contracts practices, Wardyński & Partners
The Polish version of this article was published on 8 February 2013 in Rzeczpospolita.