In this article, we make several contributions to the literature on appraisal rights and cases in which courts assign values to a company's shares in the litigation context. First, we applaud the recent trend in Delaware cases to consider the market prices of the stock of the company being valued if that stock trades in an efficient market, and we defend this market-oriented methodology against claims that recent discoveries in behavioral finance indicate that share prices are unreliable due to various cognitive biases. Next, we propose that the framework and methodology for utilizing market prices be clarified. We maintain that courts should look at the market price of the securities of a target company whose shares are being valued, unadjusted for the mews of the merger, rather than at the deal price that was reached by the parties in the transaction.
In our view, unadjusted market price has two distinct advantages over deal price. First, the unadjusted market price automatically subtracts the target firm's share of the synergy gains and agency cost reductions impounded in the deal price. This is appropriate to do because dissenting shareholders in appraisal proceedings are not entitled to these increments of value that are supplied by the bidder and it is difficult to accurately ascertain the proportion of the deal price that is attributable to these increments of value. Second, the unadjusted market price is unaffected by any flaws in the deal process that led to the ultimate merger agreement. Recently, commentators have contended that deal prices in merger transactions should be ignored in appraisal cases where there are flaws in the process that led to the sale. However, flaws in the sales process are not reflected in the unadjusted market price, so such prices are valid indicators of value, regardless of whether there were flaws in the deal process.
Further, no deal process is perfect, and ignoring market prices when a deal process is flawed succumbs to what economists call the Nirvana fallacy, which posits that an analytical approach (such as relying on market prices) should not be ignored or abandoned even if using that approach does not produce perfect results. Rather, an analytical approach should be used if it is better than the available alternatives and provides useful information to a tribunal or policymaker.
Finally, we extend our analysis of market efficiency to a new domain. We point out that market prices can be used even when shares of non-publicly traded target companies are being evaluated to determine whether the acquirer paid a fair price in certain cases by examining the share price performance of the acquirer's shares. In cases where a bidder has paid an unfairly low price for the target's shares due to self-dealing, incompetence, or inattention on the part of the seller, the acquirer's stock should react positively to the announcement of the transaction if the transaction is significant. In the absence of such a positive share price reaction on the part of the acquirer, the price should be deemed presumptively fair. This analysis seems particularly apt in situations where there is a dc line in the value of the bidder's stock upon announcement of an acquisition.
Business Organizations Law | Law | Law and Economics
Jonathan Macey & Joshua Mitts,
Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets,
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/4351