Appraising the "merger Price" Appraisal Rule

Albert Choi (University of Virginia)
Eric Talley (Columbia University)

Abstract : This paper develops an analytic framework combining agency costs, auction design and shareholder voting to study how best to measure “fair value” for dissenting shareholders in post-merger appraisal proceedings. Our inquiry spotlights an approach recently embraced by some courts benchmarking fair value against the merger price itself. We show that 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 results are robust to settings where courts commit errors in applying conventional valuation metrics (such as discounted cash flow analysis), and the analysis helps explain why conventional approaches generate outcomes that skew well above the deal price—an equilibrium phenomenon that is an artifact of strategic behavior (and not an institutional deficiency, as some assert). Finally, our analysis facilitates a better understanding of the efficiency implications of recent reforms allowing “medium-form” mergers, as well as an assortment of (colorfully named) contractual terms, such as blow provisions, drag-alongs, and “naked no-vote” fees.

Reckoning Contract Damages: Valuation of the Contract As an Asset

Victor Goldberg (Columbia Law)

Abstract : This paper argues for a general principle that should guide application of claims for direct damages for breach of contract—the contract is an asset and the problem is one of valuation of the change in value of that asset at the time of the breach. It begins with the breach of a simple sales contract and then moves on to consider the anticipatory repudiation of complex long-term agreements and damage claims in international arbitrations..

The Promise of Reward Crowdfunding

María Gutiérrez-Urtiaga (Universidad Carlos III de Madrid)
Maribel Sáez-Lacave (Universidad Autónoma de Madrid)

Abstract : We study reward crowdfunding, the fastest growing segment of the crowdfunding market, where, instead of a debt or equity contract, fund providers are promised some good or service in the future in exchange for their contribution to the funding of the investment project under a contract that does not penalise the creator’s failure to deliver. The existing economic and legal literature is puzzled by the platforms use of this seemingly inefficient contract where a standard pre-sale contract would appear to work better. Counter intuitively, we prove that the no-penalty contract is the optimal contract between creators of unknown talent and early adopters of their products. We show that far from being an inefficiency, the no-penalty contract is a contractual innovation specially designed for talent discovery. Traditional pre-sale contracts penalise the creators in case of non delivery, which reduces the risk of strategic non-delivery and facilitates funding. However, we show that penalties distort the signal on the creator’s ability that the market can infer from a successful crowdfunding campaign in a way that reduces the potential for talent discovery and therefore are sub-optimal in this context. Interestingly, neither intangibles nor demand uncertainty -which are considered key aspects of reward crowdfunding- are driving this result. Nevertheless, their presence facilitates funding under the no-penalty contract. Our analysis has important policy implications on how backers should be protected. Standard measures of consumer or investor protection may be counterproductive.