Why Fairness Opinions Should Be Delivered Before Signing a De-SPAC Business Combination Agreement

In recent years, special purpose acquisition companies (“SPACs”) have emerged as a popular alternative to traditional initial public offerings. At the core of every SPAC transaction lies a pivotal moment: the signing of the business combination agreement (“BCA”) between the SPAC and the target company. As SPAC transactions face growing regulatory scrutiny and litigation risk, one critical element of board governance has come under the spotlight — the timing and role of the fairness opinion.

1. What Is a Fairness Opinion?

A fairness opinion is a letter provided by an independent financial advisor analyzing whether the financial terms of a proposed transaction are fair, from a financial point of view, to the shareholders of the SPAC. While not required by federal securities laws, fairness opinions are considered a best practice and are often relied upon by boards to support their fiduciary decision-making process.

2. Why Timing Matters

A common question that arises in the de-SPAC process is: Should the fairness opinion be delivered before or after the signing of the business combination agreement? From a legal, governance, and disclosure standpoint, the clear answer is before.

The board of directors of a SPAC is required to make an informed decision in approving the BCA. To fulfill its fiduciary duty of care under Delaware law (and other jurisdictions with similar standards), the board must consider whether the transaction is in the best interests of the SPAC’s shareholders. A fairness opinion is one of the key tools that helps the board make this determination. Approving a merger without the benefit of a fairness opinion may later be seen as a decision made without all material information, exposing the board to criticism or legal claims.

3. Risks of Delivering the Fairness Opinion After Signing

1. Fiduciary Duty Concerns: If the fairness opinion is delivered only after the BCA is signed, it creates a potential gap in the board’s decision-making process. Plaintiffs in shareholder litigation may argue that the board breached its duty of care by committing to the transaction without having a fully informed view of its financial fairness. Courts have looked unfavorably on directors who fail to seek independent financial advice before executing material corporate actions.
2. SEC Disclosure Issues: In a de-SPAC transaction, the SPAC files a proxy statement (or registration statement on Form S-4 or F-4) with the SEC. This filing includes a summary of the fairness opinion and the process leading up to the merger. If the fairness opinion was not obtained prior to board approval, the company may face challenging disclosure questions from the SEC during the comment process. The delay in obtaining the opinion will need to be explained, which can lead to more extensive scrutiny, prolonged review, and potential amendments.
3. Shareholder Confidence and Litigation Risk: SPAC transactions are already under the microscope from both investors and regulators. A delayed fairness opinion can signal a rushed or flawed process, undermining shareholder confidence and increasing the likelihood of litigation — particularly if the transaction underperforms post-closing or if there are redemption-related conflicts of interest.
4. Undermined Purpose of the Opinion: A fairness opinion is intended to inform the board’s decision, not to ratify it. If obtained post-signing, it loses its core function. It cannot retroactively justify a decision that was already made, and may appear to be mere window dressing for an already finalized deal.

4. Real Life Situation

A. Fiduciary Duty Risk

In any de-SPAC transactions, the parties are rushing to sign the BCA as soon as possible because the SPAC has an infinite period of time to consummate its business combination. At times, parties may rush the due diligence process and the fairness opinion process. This presents issues for the SPAC’s management team. The SPAC board of directors has a fiduciary duty to act in the best interests of shareholders. A fairness opinion is typically used to support the board’s decision that the transaction is fair from a financial point of view. If the opinion is obtained after the board approves and signs the business combination agreement, the board risks being seen as having made the decision without fully informing itself, which could be a breach of its duty of care.

B. Form F-4/S-4 Proxy Disclosure Issues

The fairness opinion (or a summary of it) is usually disclosed in the proxy statement or registration statement (e.g., Form S-4 or F-4). If the opinion was not obtained until after signing, the SPAC would have to disclose the timing and reason for the delay, which could raise red flags with the SEC and investors. This may require additional disclosure to mitigate the appearance that the board approved the deal without sufficient financial advice.

C. Shareholder Litigation Risk

SPAC transactions are frequently challenged by shareholders alleging inadequate disclosures or breaches of fiduciary duty. The absence of a fairness opinion at signing can fuel such claims, especially if the valuation later appears questionable.

D. Regulatory Scrutiny

The SEC may ask questions in comment letters about why the fairness opinion was not available before the board approved the transaction. This could lead to delays in effectiveness of the registration statement and a requirement to amend or supplement disclosures.

E. Market and Investor Confidence

Investors and PIPE participants often view the fairness opinion as a credibility signal. A delay in its delivery may undermine confidence in the board’s process and valuation judgment.

5. Best Practices

Given these risks, SPAC boards should ensure that any fairness opinion is obtained and reviewed before the business combination agreement is signed. Legal counsel should document the board’s reliance on the opinion in its resolutions and minutes. Additionally, the financial advisor should participate in board meetings to explain the opinion and answer questions, further supporting the board’s informed decision-making process.

If for any reason the fairness opinion is not available prior to signing—for example, due to deal timing constraints—the board should carefully document its rationale for proceeding and ensure that full disclosure is made in the SEC filings, including the timing of the opinion and its limitations.

6. Conclusion

While fairness opinions are not legally mandated, they have become a critical component of SPAC governance. Delivering the opinion before signing the BCA reinforces the integrity of the board’s process, enhances disclosures, and provides an added layer of protection against shareholder litigation. In the current environment of heightened scrutiny of de-SPAC transactions, timing is not just a procedural detail — it’s a legal safeguard.

For SPAC sponsors, target companies, and their advisors, adhering to best practices in board process — including the timely delivery of fairness opinions — is not only prudent but essential for mitigating risk and ensuring regulatory compliance.