Maybe Publius Was Right: Relying on Merger Price To Determine Fair Value in Delaware Appraisal Cases

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In this Comment, I argue that calls for reform to the appraisal remedy should be aimed at the Delaware Court of Chancery. The purpose of this Comment is not to express a normative judgment about the overall desirability of appraisal arbitrage; rather, I propose a shift away from the Chancery Court’s oft‐favored valuation technique, discounted cash flow (DCF) analysis, in appraisal cases arising out of certain third‐party, or arm’s‐length, transactions. The Chancery Court should instead rely on merger price as the best estimate of the “fair value” of an appraisal petitioner’s shares when (1) the inputs required for a DCF analysis are unreliable and (2) there has been a genuine market test.

Reliance on the merger price under these conditions would allay concerns on both sides of the debate. For proponents of appraisal arbitrage, this valuation approach does not impinge on shareholders’ ability to resort to the appraisal remedy by restricting their deadline to the record date. Additionally, the Chancery Court’s embrace of merger price would incentivize additional disclosure by target companies in order to demonstrate that the sale process was fulsome. For opponents of appraisal arbitrage, when there has been a genuine market test and a DCF analysis is unreliable, the use of merger price punishes appraisal petitioners when their claims are unwarranted (i.e., purely speculative investments aimed at low‐premium transactions). Appraisal arbitrageurs cannot profit from “buying into” a lawsuit when the merger price is used as fair value; they must bear litigation expenses and additionally may face a “synergy deduction,” as appraisal claimants cannot capture any value arising from the expectation of the merger. Thus, this approach to valuation would only encourage claims where there is real reason to believe that the price achieved in the merger was not “fair”—namely, in controlling shareholder and parent/subsidiary mergers—and would remove some uncertainty from third‐party mergers (the transactions that are the primary focus of M&A lawyers).

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