Stock Market Value and Deal Value in Appraisal Proceedings

Abstract

This essay considers the relationship between two methods of valuing public companies in appraisal proceedings: the unaffected market price, the reliability of which depends on the applicability of the efficient capital markets hypothesis, and the deal price (less synergies, as applicable), the reliability of which depends on the robustness of the target’s sales process. Following the landmark cases DFC and Dell, the Delaware courts have favored market-based methods of valuation in appraisal cases, and so they have commonly looked to both the market price and the deal price in valuing companies. When the preconditions for the reliability of one method have not been satisfied, courts have sensibly looked to the other method. There are many cases, however, where the preconditions of both methods are satisfied, and in such cases there should be some principled basis for using one method rather than the other. The deal price is routinely much greater than the market price, and any principled basis for using one price rather than the other will depend on how we account for this phenomenon. This essay argues that the explanations implicit in the caselaw (synergies, material non-public information) are manifestly inadequate, and the correct explanation is that shares of the company’s stock have downwardly sloping demand curves arising from the fact that, even when sophisticated market participants have all the same information about the company, they will interpret it differently and so come to different judgments about the company’s value. Adopting this heterogeneous expectations assumption, the essay argues that, when the preconditions of both methods of valuation are satisfied, courts should generally look to the deal price (less synergies, as applicable) rather than the unaffected market price to value the company in appraisal.

Keywords: appraisal, appraisal rights, dissenters rights, dgcl 262, unaffected market price, deal price, market price, synergy, downwardly sloping demand curve, heterogeneous expectations, homogeneous expectations

JEL Classification: K22, G14, G30, G34