The Appraisal Remedy and Merger Premiums

Abstract

The appraisal remedy affords a shareholder the option redeem her shares for cash in the event of certain corporate actions, such as mergers. While appraisal appears to have been developed to protect shareholders who might oppose a corporate action yet be unable to sell their shares for fair value in a liquid market, the value of appraisal to shareholders of publicly traded firms is questionable. This is especially true when we realize that shareholder class actions for breach of fiduciary duty provide an alternative avenue of recovery and are easier to initiate. In this paper we present the first large-scale empirical study of the effect of access to appraisal on target shareholder gains from acquisitions. We examine 1,350 mergers involving publicly held firms. In some of these mergers dissenting shareholders could seek an appraisal and in others appraisal was not available. We find some evidence that appraisal offers dissenting shareholders hold-up power that reduces average shareholder gains in certain transactions. However, for the entire sample, we find no evidence that appraisal has any effect, positive or negative, on target shareholder gains from takeovers.

JEL Classification: G3, K2