Monday, February 6, 2023
Carney & Sharfman: Whither Judicial Valuation?
I teach a unit on the legal aspects of valuation in my Corporate Finance planning and drafting seminar every year. I have often been able to secure as a guest speaker on one day during that unit a friend of mine who is a seasoned valuation expert (and was the expert whose opinion carried the day in the most recent Tennessee Supreme Court case on valuation in an M&A context).
There is a relatively large body of academic literature on appraisal (a/k/a dissenters') rights and, more generally, the history of valuation law and practices in the M&A context. In the Business Associations textbook of which I am a coauthor, I excerpt from Mary Siegel's 1995 article, Back to the Future: Appraisal Rights in the Twenty-First Century (32 Harv. J. on Legis. 79). Her 2011 follow-on article, An Appraisal of the Model Business Corporation Act's Appraisal Rights Provisions (74 Law & Contemp. Probs 231 (2011)), also is a good read on appraisal rights history. Other legal academics who have dipped their toes into these waters include George Geis, Bayless Manning, Brian JM Quinn, Randall Thomas, and Barry Wertheimer (who is no longer a law professor), and many more.
I am excited to report that there is a new kid (really, two coauthor new kids) on the block. Bill Carney has coauthored a new article on appraisal rights with Keith Sharfman entitled: The Exit Theory of Judicial Appraisal (28 Fordham J. Corp. & Fin. L 1 (2023)). The SSRN abstract follows.
For many years, we and other commentators have observed the problem with allowing judges wide discretion to fashion appraisal awards to dissenting shareholders on the basis of widely divergent, expert valuation evidence submitted by the litigating parties. The results of this discretionary approach to valuation have been to make appraisal litigation less predictable and therefore more costly and likely. While this has been beneficial to professionals who profit from corporate valuation litigation, it has been harmful to shareholders, making deals costlier and less likely to complete.
In this Article, we propose to end the problem of discretionary judicial valuation by tracing the origins of the appraisal remedy and demonstrating that its true purpose has always been to protect the exit rights of minority shareholders when a cash exit is otherwise unavailable, and not to judge the value of the deal. So understood, judicial appraisal should not be a remedy for dissenting shareholders when a market exit or equivalent protection is otherwise available.
While such reform would be costly to valuation litigation professionals, their loss would be more than offset by the benefit of such reforms to shareholders involved in future corporate transactions. Shareholders presently have adequate protections, both from private arrangements and legal doctrines involving fiduciary duties.
I am grateful that Bill passed a copy of the article along to me yesterday. This is a topic that generates significant interest in a variety of business law courses that I teach/have taught (including, in addition to Corporate Finance, Advanced Business Associations, Business Associations, and Mergers & Acquisitions). Students love puzzling through the issues, asking, e.g.:
- Why do appraisal rights exist?
- Why do we not see many reported appraisal rights opinions?
- How do planners and drafter address the existence of appraisal rights in practice?
Based on a quick peek at the table of contents of Bill's and Keith's article, I sense their work will offer the reader some answers to these and other related questions.