Appraising the ‘Merger Price’ Appraisal Rule

This paper develops an analytic framework combining agency costs, auction design and shareholder voting to study how best to measure “fair value” for dissident shareholders in a post-merger appraisal proceeding. Our inquiry spotlights an approach recently embraced by some courts that benchmarks fair value against the merger price itself, at least in certain situations. As a general matter, the “Merger Price” (MP) rule tends to depress both acquisition prices and target shareholders’ expected welfare relative to both the optimal appraisal policy and several other plausible alternatives. In fact, we demonstrate that 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 unlikely to be widespread and, consequently, the rule should be employed with caution. Our framework also helps explain why a healthy majority of litigated appraisal cases using conventional fair-value measures result in valuation assessments exceeding the deal price—an equilibrium phenomenon that is an artifact of rational, strategic behavior (and not necessarily an institutional deficiency, as some assert). Finally, our analysis facilitates better understanding of the strategic and efficiency implications of recent reforms allowing “medium-form” mergers, as well as an assortment of (colorfully named) appraisal-related practices, such as blow provisions, drag-alongs, and “naked no-vote” fees.

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