Monthly Archives: January 2017

In a new working paper, we consider the question of how best to measure “fair value” in a post-merger appraisal proceeding. Our inquiry spotlights an approach recently embraced by Delaware courts, which pegs fair value at the merger price itself (at least in certain situations). Using an economic framework that combines auction design, agency costs and shareholder voting, we assess how this “Merger Price” (MP) rule stacks up against alternative approaches (such as DCF) that are not benchmarked against the merger price.

Our analysis shows that as a general matter, the MP rule tends to depress both acquisition prices and target shareholders’ expected welfare relative to both an optimal appraisal rule and several other plausible alternatives. In fact, we demonstrate that the MP rule is strategically equivalent to nullifying the appraisal right altogether. Although the MP rule may be warranted in certain circumstances, our analysis suggests that such conditions are unlikely to be widespread, and—consequently—the rule should be employed with caution. Our framework also helps explain why a majority of litigated appraisal cases using conventional fair-value measures result in valuation assessments exceeding the deal price—an equilibrium phenomenon that stems from rational, strategic behavior (and not from an institutional deficiency, as some commentators have suggested). Finally, our analysis illuminates the strategic and efficiency implications of a variety of appraisal-related related phenomena, such as Delaware’s new “medium-form” merger statute, blow provisions, drag-alongs, and “naked no-vote” fees.

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