Scott Callahan, Darius Palia & Eric L. Talley, Appraisal Arbitrage and Shareholder Value, 3 J. L. Fin. & Accounting, 147 (2018)
This paper considers the question of whether the 2007 reforms had the negative repercussions that critics lament, both from theoretical and empirical perspectives. Theoretically, we extend the auction-design framework developed in Choi and Talley (2017) to derive a series of comparative statics related to observable factors concerning M&A transactions and target shareholder welfare. Using this model, we demonstrate that a credible threat of an appraisal action can sometimes constitute a valuable vehicle for augmenting shareholder value, whereby the specter of later appraisal value acts as a credible type of “reserve price” in a company auction. … More significantly, our model delivers testable empirical predictions relating to how “shocks” to the appraisal remedy affect expected shareholder value. In particular, we show that under plausible assumptions as to the status quo ante, a liberalizing shock to appraisal will lead to enhanced target shareholder welfare if it is accompanied by an increase in expected merger premia for appraisal eligible deals.
We then test this (and related) predictions empirically using the 2007 reforms as an appraisal-liberalizing shock. First, we demonstrate (consistent with our model) that deal premia are discernibly higher in appraisal eligible transactions (even when one accounts for the tax status of the deal). Second, we use a difference-in-differences specification to consider the combined effects of the 2007 shocks (Transkaryotic and the amendment of DGCL 262(h)) on deal premia for appraisal-eligible acquisition (using appraisal-ineligible deals as 4Formally, this condition also requires the assumption that under the status quo ante, a control). We find consistent evidence that the liberalizing 2007 shocks were followed by significant increases in premia associated with appraisal eligible deals relative to the control group.
The Delaware Court of Chancery recently confirmed in Salladay v. Lev that conditioning a conflicted (but non-controller) transaction upon approval by a fully empowered, disinterested and independent special committee can restore the business judgment standard of review for the transaction (rather than the more burdensome entire fairness standard that would otherwise apply). However, the court (in an opinion by Vice Chancellor Glasscock) found that such special committee “cleansing” works only if the special committee protections are put in place prior to the commencement of discussions about what might constitute an acceptable price. In Salladay, the court held that the company chairman’s discussions with the acquirer regarding price created a price collar before the special committee was formed that set the tone for future negotiations, and therefore, the special committee’s approval of the transaction did not restore the business judgment standard of review.
CME Group CME, -3.65% says it has been testing negative trades for oil futures, of major energy prices fall below zero. “CME Clearing has a tested plan to support the possibility of a negative options underlying and enable markets to continue to function normally,” the exchange operator said in a note on April 8.
In the highly anticipated decision of Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020), the Delaware Supreme Court, reversing the Delaware Court of Chancery’s decision, confirmed the facial validity of provisions in the certificates of incorporation of Blue Apron Holdings, Inc., Stitch Fix, Inc., and Roku, Inc. requiring all claims under the Securities Act of 1933 (the “’33 Act”) to be brought in federal courts (“Federal Forum Provisions”). Similar provisions have been adopted by dozens of Delaware corporations and are intended to address the inefficiencies of multi-jurisdictional ’33 Act litigation in light of the increasing number of ’33 Act claims filed in state, rather than federal, courts.
In fulfilling the statutory mandate to account for “all relevant factors” bearing on “fair value,” Delaware courts consider a range of evidence that often includes (i) “market evidence,” such as a company’s unaffected trading price or the “deal price” following an appropriate “market check” and (ii) “traditional valuation techniques,” such as a comparable company, comparable transaction or DCF analysis. In this case, however, the parties and their experts agree that the circumstances surrounding the Business Combination disqualify market evidence as reliable inputs for a fair value analysis. Accordingly, the valuation presentation from both sides focused on DCF. In my view, that focus was well placed.
SourceHOV’s deal process (or lack thereof) undermines any reliance on deal price as an indicator of fair value. Moreover, as a private company, SourceHOV’s equity was not traded in an efficient market, so its unaffected market price is also an unreliable indicator of fair value. Without reliable market evidence of fair value, the parties were left to focus on “traditional valuation methods” to appraise SourceHOV. This, of course, places the spotlight squarely on their competing valuation experts. In other words, as I see it, this case has played out as the quintessential “battle of the experts.”
Both experts agree there are no sufficiently comparable companies or transactions with which to perform either a trading multiples or a transaction multiples analysis. Given that other valuation techniques do not fit here, both experts also agree that a DCF analysis is the only reliable method to calculate SourceHOV’s fair value. In light of the experts’ agreement, and seeing no reason to disagree, I am satisfied that a DCF analysis is the only reliable indicator of SourceHOV’s fair value. (footnotes omitted)
In this appraisal action, I must determine the fair value of each share of the subject company on the closing date of its acquisition. I find that the process by which the company was sold bore several objective indicia of reliability, which were not undermined by flaws in that process. I therefore find that the deal price is persuasive evidence of fair value, and give no weight to other valuation metrics. I deduct some synergies, but find others were not adequately proven. I undergo that synergies analysis solely to fulfill my statutory mandate, rather than to effectuate any transfer of funds between the parties, because the company prepaid the entire deal price and has no recourse for a refund under the appraisal statute.