The Flawed Corporate Finance of Dell and DFC Global

Abstract

In a pair of momentous decisions, the Delaware Supreme Court recently attempted to bring clarity and reason to a corporate law topic of increasing importance: appraisal rights. In both decisions — Dell and DFC Global — the Court insisted that it did nothing more than apply “established principles of corporate finance.” Yet in analyzing the financial ideas and concepts at play, the Court made four critical mistakes. First, the Supreme Court ignored the differences between how public markets price risk and how private parties — particularly financial sponsors — price risk. Second, the Court took the well-supported evidence of information efficiency in securities markets as necessarily implying a high degree of value efficiency. It then compounded this error by attributing this value efficiency not simply to the securities market but also to the deal market. Third, the Court succumbed to a flawed analogy between the fiduciary duty and appraisal contexts, implying that conditions of pricing efficiency are met whenever directors satisfy their minimum fiduciary obligations. Fourth, the Court treated company valuation as a mechanical, arithmetical calculation, downplaying the essential role of human judgment. This Article analyzes these errors and considers some potential implications for the future of appraisal rights in particular and for M&A markets and diversified public stockholders more generally.

Keywords: appraisal rights, Delaware, corporate finance, corporate law, mergers, M&A, corporate control