November/December 2009 / Features
Solvency Opinions
Parties – typically the buyer – that have signed M&A or other deal agreements in better times now may find they want to scuttle the agreement. Usually the most effective exit is through the “insolvency-out clause,” which provides that the buyer can walk away if the target becomes insolvent.
In part because of the effects of a recent Delaware Chancery Court opinion, parties are now obliged to look carefully at how solvency opinions are developed and how they might be challenged. Their defensibility, the authors note, is primarily a function of the due diligence that went into preparing them. A solvency opinion takes into account such factors as the company’s history, how it creates new products and services, its relationships to suppliers, its contingent liabilities, and a variety of labor, marketing and management issues. On-the-ground methods such as inspections, discussions with personnel and review of key business documents should be employed in preparing it.
The authors describe the two principal analytical methods used in solvency opinions: comparative company analysis, which looks at company results vis a vis some group selected for comparison, and single company analysis, based on various quantitative measures. Each may be subject to challenges. “Solvency opinion providers are not insurers,” the authors note, and clients should be aware of the assumptions and limitations under which they operate.
