Solvency Opinions - Leveraged Dividend Transactions
Paying a special dividend – especially when funded with additional debt – can leave boards of directors exposed to personal liability. Relying on a third-party solvency opinion creates a “safe harbor” (under state laws) for directors that approve such transactions. In addition, solvency analysis provides valuable information for management teams and boards in analyzing the effects of leverage on projected financial results.
Solvency Opinion Overview
Solvency opinions address two important statues in corporate law: (1) statues governing a company’s capacity to pay a distribution, pursuant to corporation, partnership and/or LLC laws in the state of domicile; and (2) the Uniform Fraudulent Transfer Act, which governs transfers without adequate consideration (dividends fall into this category).
A solvency opinion is a collection of determinations, which are responsive to these two statutes. Specifically, solvency opinions state whether: (a) the company has the capacity to pay the dividend and (b) after giving effect to the dividend, (i) the company’s assets, at a fair valuation, would exceed its debts, (ii) the company would not be left with unreasonably small assets (or capital), and (iii) the company should be able to pay its debts as they come due.
In addition to a company’s board of directors, company officers may also rely on a solvency opinion when providing an officers’ solvency certificate, which is typically a closing condition of any related financing. Solvency opinions also may be required by lenders in a leveraged transaction.
The Duff & Phelps Difference
- Duff & Phelps is a globally recognized leader in solvency opinions.
- Since 2005, Duff & Phelps rendered over 650 solvency opinions aggregating $2.8 trillion in deal value.
- We give each engagement senior level attention; every assignment is overseen by a Corporate Finance managing director in the Transaction Opinions group.
- We thoroughly document our process, analysis and conclusions and stand ready to defend our work should the need arise.
- Duff & Phelps has a proven track record and reputation for working well with management teams and their outside advisors.
- Each opinion and board presentation is reviewed and approved by our Transaction Opinion Senior Review Committee.
The Types of Transactions That May Require a Solvency Opinion
- Dividend recapitalizations
- Debt refinancings
- Intercompany restructurings
- Spin-offs and split-offs
- Large stock buybacks
Who Engages Us?
- Companies and their boards of directors
- Private equity firms