Protect your board from fraudulent transfer liability in leveraged transactions.
A solvency opinion is a professional assessment that evaluates whether a company will remain solvent after a proposed transaction—typically one involving leverage, distributions to shareholders, or significant changes to capital structure.
Under fraudulent transfer laws (both state and federal), directors can face personal liability if a company makes transfers while insolvent or that render it insolvent. A solvency opinion from an independent third party provides evidence that the board acted with due care.
The three-prong test: A company is generally considered solvent if (1) fair value of assets exceeds liabilities, (2) it can pay debts as they come due, and (3) it has adequate capital for its business going forward.
A solvency opinion provides:
Transactions that extract value from the company while adding leverage
PE-backed companies borrowing to pay dividends to sponsors need solvency opinions to protect against claw-back claims.
LBO transactions where acquisition debt sits on the target's balance sheet create potential fraudulent transfer exposure.
Significant buybacks, especially debt-financed, may require solvency analysis to protect the board.
Distributing a subsidiary to shareholders raises solvency questions for both parent and spun entity.
When a company guarantees obligations of affiliates, solvency analysis protects against liability.
Transactions close to financial distress require careful solvency analysis to avoid preference claims.
Our analysis addresses all three standards
We determine whether the fair value of assets exceeds liabilities immediately after the transaction. This requires valuing assets at fair value, not book value.
We analyze whether the company can pay its debts as they come due. This examines projected cash flows, debt service requirements, and liquidity.
We assess whether the company has adequate capital to conduct its business going forward, considering industry norms and business risks.
We stress-test projections under adverse scenarios to understand the margin of safety on each test.
We provide a formal opinion addressing each prong, with detailed supporting analysis.
If the opinion is later challenged, we're prepared to defend our analysis in court.
Audited financials use book value, not fair value. Solvency analysis requires fair value of assets—often significantly different, especially for intangibles and real estate.
Typically 2-5 years, depending on debt maturity schedules and business cycles. The goal is to assess ability to meet obligations as they come due.
Generally 2 years under federal bankruptcy law, though state laws vary. Some states have 4-6 year look-backs, and insider transactions may have longer periods.
Often yes, especially for dividend recaps and leveraged transactions. Lenders want assurance they're not financing a fraudulent transfer.
Fairness opinions address whether transaction terms are fair. Solvency opinions address whether the company can survive the transaction. Often both are needed.
A solvency opinion rendered in good faith, based on reasonable assumptions at the time, provides strong evidence of due diligence even if circumstances later change.
Discuss your leveraged transaction with our team.