Tuesday, February 7, 2017
Appraisal and Merger Price
Over the past couple of years something has been happening in appraisal litigation. For a long time, appraisal litigation was something of a backwater: experts battling over which variables a judge must insert into a discounted cash flow model and the proper level for beta. Shoot me.
Anyway, as I said, something is happening. Appraisal litigation is getting more interesting. In part this is a response to the growing interest in appraisal proceedings by investment funds. Myers and Korsmo wrote about this trend in their 2015 paper Appraisal Arbitrage and the Future of Public Company M&A. As they laid out in their paper, there has been an explosion in investor interest in appraisal proceedings. Appraisal arbitrage, it turns out, is good business.
As the number of appraisal actions has increased (partly also in response to the Corwin ruling having some bite), so too has attention to how fair value is determined by the courts. In the last couple of years, at the Chancery Court, chancellors have started moving away from the view that the court will determine fair value without regard to the merger price. Now, in certain circumstances (where the deal price is a product of a competitive or robust sales price) chancellors may consider merger price as one of the relevant factors for purposes of determining fair value.
Now this question has found its way to the Delaware Supreme Court and the parties are lining up on both sides. There are even amici! Two sets of amici have rolled up: on the one side there are law professors arguing that the court should be able to presumptively rely on merger price to determine fair value in an appraisal proceeding unless that price does not result from arm's length bargaining (DFC Holdings - Bainbridge, et al). On the other are law professors arguing requiring a court to rely on merger price to determine fair value would run counter to the language of the statutory appraisal remedy and also not always reflect fair value (DFC Holdings - Talley, et al). Read both briefs. They are a great review of the issues relating to this issue.