Appraising the 'Merger Price' Appraisal Rule
Journal of Law, Economics & Organization (vol 35) (2019 Forthcoming)
36 Pages Posted: 22 Dec 2016 Last revised: 7 Jun 2018
Date Written: May 17, 2018
This paper develops an auction design framework to analyze various methods for assessing “fair value” 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 merger price deference effectively nullifies the role that appraisal can potentially play in establishing a de facto reserve price for company auctions, thereby depressing both acquisition prices and target shareholders’ expected welfare relative to both the optimal appraisal policy and a variety of other valuation measures. We also examine conditions under which deference to the merger price can be optimal. Our results have empirical implications for understanding appraisal, and they likewise help to inform doctrine by providing guidance to legal actors about when a sales process can be considered sufficiently “robust” to justify merger price deference.
Keywords: Mergers and Acquisitions, Appraisal, Fair Value, Merger Price Appraisal
JEL Classification: D44, D82, G34, K22
Suggested Citation: Suggested Citation