Introduction
Following a relatively low M&A year in 2024, the outlook for 2025 is largely “bullish” based on many factors, including stable interest rates, controlled inflation, and the current change in the U.S. administration. There are historically high levels of uninvested private equity investment capital, or “dry powder,” supported by a very robust private debt market—the availability of capital for companies seeking financing alternatives has never been greater. However, there is a subset of pre- and post-Covid-era transactions where many companies were forced to make less than optimal decisions that maximized their leverage and/or overextended their debt capacity. As investors and lenders move forward on healthier opportunities, there is a pronounced need for this backlog of distressed investments to be “cleaned up,” especially in situations where liquidity has decreased and companies require cash flow to fund existing operations. Some of the more strategic approaches that companies use to address their cash shortfall include distressed capital raises, debt and equity restructurings, and asset sales. However, these deal mechanisms can be complex and dilutive to a certain class of existing shareholders or involve distressed transactions. For these capital events to be recognized as fair from a financial point of view, it is important to obtain an independent fairness opinion.
1. Distressed Capital Raises
There are a variety of capital raise options in a distressed situation, but the most common transaction is “down-round” financing. A down-round financing, also known as “cram-down” financing, occurs when a company sells shares of common or preferred stock at a valuation that is less than the price it sold shares for in an earlier financing.
Many down-round financings are linked to identifiable negative events like a short-term liquidity crunch, market downturn, missed strategic milestone(s), or a company’s overall financial underperformance. The funding could also be related to an M&A opportunity or asset purchase that can help turn the company around, but there is limited access to traditional financing to fund the deal. With down-round financings, the potential for early investors and other constituents to be diluted is high, and there are risks of legal scrutiny and increased focus on conflicts of interest.
2. Debt/Equity Restructurings
Similar risks of conflicts of interest exist with debt and equity restructurings (or recapitalizations). Whether it be debt-for-equity or debt-for-debt exchanges, there are often situations where one or more classes of capital holders can be left in a worse financial position after a restructuring transaction that involves related parties.
Changes or amendments to preserve capital or add borrowing capacity under existing credit agreements can also trigger questions about fairness. For example, corporate debt originally issued to the founding owners of a company that is restructured with new private equity capital can potentially have negative implications for non-voting shareholder loans that are being subordinated or whose equity stakes are being diluted.
3. Asset Sales1
When a company is facing financial challenges, a common strategic alternative is to sell a division or other assets owned by the company to generate much-needed cash flow. Even if the transaction is executed at arm's length, boards are often advised to seek a fairness opinion to support the valuation of the asset being sold. If the sale is to a related party, it is strongly recommended that a fairness opinion be obtained.
For a 100% control sale (or acquisition) of a company, the need for a fairness opinion depends on the circumstances. In a distressed context, a §363 bankruptcy sale would not necessarily require a sell-side fairness opinion, as these types of transactions are approved by the bankruptcy court. However, if there is a risk of potential fraudulent conveyance, buyers could consider requiring the seller to provide a fairness opinion in connection with the proposed transaction. If the transaction is suspected of being a fraudulent conveyance, the opinion would support the buyer’s position that the consideration paid provided the seller with reasonably equivalent value. This would make it challenging for the sale to be nullified or invalidated.
Conclusion
For all the aforementioned distressed scenarios, the best way to mitigate potential issues relating to valuation, dilution, and conflicts of interest is to obtain a fairness opinion. Whether it is a down-round funding, capital restructuring, or sale of assets, a fairness analysis assesses the price and terms of the proposed transaction and determines if these factors are considered fair to the relevant stakeholders, effectively providing an objective perspective on the deal to protect the board of directors from potential liability. Engaging with the right firm can help decision-makers, including management, PE sponsors, and board members, meet their fiduciary duty of care by ensuring they act with due diligence when executing these complex transactions.
Recent Fairness Opinion
[1] This does not cover transactions related to §363 sales but may apply to fraudulent conveyance related valuations under §548 of the Bankruptcy Code.
Ankura's Valuation Services practice is experienced in rendering fairness opinions and providing a full range of valuation and transaction advisory services. If the Valuation Services team can be of assistance, please reach out to either Richard Hitt (312) 953-7197 or Karl D'Cunha (312) 583-3707.
Securities and Fairness Opinions Offered Through Ankura Capital Advisors, LLC (Member FINRA/SIPC).
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© Copyright 2025. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
