Gaurav Jetley is a Managing Principal and Yuxiao Huang is an Associate at Analysis Group, Inc. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.
There is an ongoing debate regarding the extent to which increased appraisal litigation in the Delaware Chancery Court is beneficial from a public policy perspective. A paper published in the May 2019 issue of The Journal of Law and Economics—“Merger Negotiations in the Shadow of Judicial Appraisal,” by Audra Boone, Brian Boughman, and Antonio J. Macias (hereafter “Boone et al.”)—contributes to this discussion. The authors find, among other things, that compared to deals without appraisal challenges, deals subject to appraisal challenges have, on average, a 6% lower post-announcement arbitrage spread. (See Figure 1.) Based on this observed gap, the authors claim that appraisal challenges benefit target shareholders by narrowing arbitrage spreads. In particular, they state that
“[t]he narrower spread provides preexisting investors in such firms the option to receive approximately 6 percent more value if they decide to sell prior to closing (insuring against the risk of deal failure). Passive investors have the opportunity to share in some of the gains from merger arbitrage.”
