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.