This paper develops an auction design framework to study how best to measure “fair value” in post-merger appraisal proceedings. Our inquiry spotlights an approach recently embraced by some courts benchmarking fair value against the merger price itself. We show that ex ante commitment to a “Merger Price” (MP) rule tends to depress both acquisition prices and target shareholders’ expected welfare relative to both the optimal appraisal policy and other plausible alternatives. In fact, we demonstrate the MP rule is strategically equivalent to nullifying appraisal rights altogether. Although the MP rule may be warranted in certain circumstances, our analysis suggests that such conditions are not categorical, and consequently the rule should be employed with caution. Our results are robust to settings where courts may err in applying conventional valuation metrics (such as discounted cash flow analysis), and they demonstrate why conventional approaches generate outcomes that skew well above the deal price — an equilibrium phenomenon that stems from strategic behavior (and not an institutional deficiency). Finally, our analysis facilitates a better understanding of the efficiency implications of recent reforms allowing “medium-form” mergers, as well as an assortment of (colorfully named) contractual terms, such as blow provisions, drag-alongs, and “naked no-vote” fees.
Albert H. Choi & Eric L. Talley,
Appraising the 'Merger Price' Appraisal Rule,
Virginia Law and Economics Research Paper No. 2017-01
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2020