Thursday, October 8, 2009
How does one measure the fair value of a corporation when a controlling shareholder squeezes out the minority interest? Professor Lawrence A. Hamermesh, of Widener University, and Professor Michael L. Wachter of University of Pennsylvania Law School, answer that question in "Rationalizing Appraisal Standards in Compulsory Buyouts" by suggesting that the “going concern value” standard—currently adopted by the Delaware courts—is more fair and efficient than other valuation methodologies. Where a merger creates corporate control by aggregating dispersed shares, any increase in corporate value rightly belongs to the controlling shareholder. But where the merger merely squeezes out a minority interest, no aggregation of control takes place and therefore no premium should be awarded. In such situations, if the controlling shareholder fails to present a discounted cash flow analysis to facilitate the valuation of the company, the minority shareholders risk undervaluation of their shares. To guard against this, Professors Hamermesh and Wachter advocate a default presumption based on comparable company valuations. Such a presumption puts the burden on the controlling shareholder to come forward with accurate projections for the future value of the company or risk having the courts award the control value to minority shareholders.