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CLS BlueSkyBlog recently posted regarding the interaction of the Delaware business judgment rule and appraisal.  Focusing on the Delaware Supreme Court’s commentary in Dell, the author of the post highlights that unlike Dell – which was a management buyout – hostile takeovers may implicate the intersection of appraisal and the business judgment rule in unique ways.  The author proposes that with a hostile takeover management may well be committed to a higher value as a way of encouraging resistance to the bidder.

The post focuses attention on the important intersection of the business judgment rule and appraisal rights; shareholder and management incentives are not always aligned, and not every merger situation is identical.  Appraisal rights are so critical because shareholders (especially minority shareholders) retain a fundamental right to avoid having their fortunes be tied to managements’ incentives.

In this post by Professor Afra Afsharipour of the UC Davis School of Law, she discussed what she identifies as the bidder overpayment problem, where bidders often pay more for publicly traded targets due to managerial agency costs and behavioral biases. The article notes that there are less monitoring mechanisms for bidder shareholders than there are for target shareholders to ensure a fair price. For instance, while target shareholders can bring appraisal proceedings in some transactions, bidder shareholders do not receive any appraisal rights even in transactions where they have the right to vote. The author ultimately argues for a “shareholder voice in situations of high importance to firm value and share price.”

 

The Harvard Law School Forum on Corporate Governance and Financial Regulation has published a post by authors Professor Yair Listokin and Mr. Inho Andrew Mun, regarding corporate law in a financial crisis. Reviewing the crisis in 2008 and the rescue mergers that occurred, the authors propose that during a financial crisis, corporate law changes–in particular with respect to mergers. By replacing voting rights with appraisal rights, the authors propose that the efficiency gains pre-merger, whereby crisis actors would be able to move with more alacrity and fewer technical issue holdups, would be balanced by the protection of shareholder rights post-merger: by appraisal.

The authors certainly hit upon a basic reality: Appraisal rights remain a viable protection for shareholder interests and rights, and are one of the few post-merger remedies that exist. The authors’ idea to apply what would effectively be “super-appraisal” in a crisis–collapsing pre-merger remedies into the post-merger appraisal remedy–is certainly an innovative suggestion.

The article is available here.

In a new post by the Harvard Law School Forum on Corporate Governance and Financial Regulation, Professor Albert Choi (Virginia Law School) and Professor Eric Talley (Columbia Law School) present their new working paper, which asks how best to measure “fair value” in an appraisal proceeding.

Applying principles of game theory and auction design, the authors show that as a general matter, setting the appraised value at merger price (using a so-called MP rule) “depress both acquisition prices and target shareholders’ expected welfare relative to both an optimal appraisal rule and several other plausible alternatives.”  The authors argue that the MP rule is the functional equivalent of nullifying the appraisal right altogether.