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 merger price deference effectively nullifies the role that appraisal can potentially play in establishing a de facto reserve price for company auctions, thereby depressing both acquisition prices and target shareholders’ expected welfare relative to both the optimal appraisal policy and a variety of other valuation measures. We also examine conditions under which deference to the merger price can be optimal. Our results have empirical implications for understanding appraisal, and they likewise help to inform doctrine by providing guidance to legal actors about when a sales process can be considered sufficiently “robust” to justify merger price deference.
Albert H. Choi & Eric L. Talley,
Appraising the "Merger Price" Appraisal Rule,
Journal of Law, Economics & Organization, forthcoming
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2020