Post by Sapphire Capital on Sept 8, 2008 20:33:14 GMT 4
Rationalizing Appraisal Standards in Compulsory Buyouts
Lawrence A. Hamermesh
Widener University School of Law
Michael L. Wachter
University of Pennsylvania Law School
August 21, 2008
U of Penn, Inst for Law & Econ Research Paper No. 08-20
Widener Law School Legal Studies Research Paper No. 08-73
Abstract:
This Article makes two contributions to the literature on Delaware appraisal law. First, we make a normative argument that supports the Delaware courts' choice of going concern value as the measure of "fair value" in share valuations. We argue that the going concern value standard is superior to its two main competitors, market value and third-party sale value, on grounds of both fairness and efficiency, as long as the application of that standard includes not only the present value of the existing assets of the corporation, but also the present value of the reinvestment opportunities available to and anticipated by the firm at the time of merger. This inclusion of the present value of the reinvestment opportunities addresses concerns over the possibility that opportunistic controllers might take the corporation private at an unfairly low price.
Second, we argue that while the "implicit minority discount" (IMD) identified by the courts is inconsistent with corporate finance, the valuation method developed by the courts to address it leads to the correct result in cases of controller squeeze-out mergers. The addition of a control premium resulting from that valuation method, however, would be inappropriate in all other types of mergers. We draw this distinction because in controller squeeze-out mergers, the value of control is already embedded in the enterprise prior to the merger and thus belongs to the existing shareholders pro rata. In contrast, when control is first created in a squeeze out merger the benefits created by the aggregation of shares belong to the party that created the increased value. In this approach, the value of control is treated similarly to the value of synergies; that is, the benefit belongs to the entity that creates the benefit.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1247442_code711466.pdf?abstractid=1244665&mirid=3
Lawrence A. Hamermesh
Widener University School of Law
Michael L. Wachter
University of Pennsylvania Law School
August 21, 2008
U of Penn, Inst for Law & Econ Research Paper No. 08-20
Widener Law School Legal Studies Research Paper No. 08-73
Abstract:
This Article makes two contributions to the literature on Delaware appraisal law. First, we make a normative argument that supports the Delaware courts' choice of going concern value as the measure of "fair value" in share valuations. We argue that the going concern value standard is superior to its two main competitors, market value and third-party sale value, on grounds of both fairness and efficiency, as long as the application of that standard includes not only the present value of the existing assets of the corporation, but also the present value of the reinvestment opportunities available to and anticipated by the firm at the time of merger. This inclusion of the present value of the reinvestment opportunities addresses concerns over the possibility that opportunistic controllers might take the corporation private at an unfairly low price.
Second, we argue that while the "implicit minority discount" (IMD) identified by the courts is inconsistent with corporate finance, the valuation method developed by the courts to address it leads to the correct result in cases of controller squeeze-out mergers. The addition of a control premium resulting from that valuation method, however, would be inappropriate in all other types of mergers. We draw this distinction because in controller squeeze-out mergers, the value of control is already embedded in the enterprise prior to the merger and thus belongs to the existing shareholders pro rata. In contrast, when control is first created in a squeeze out merger the benefits created by the aggregation of shares belong to the party that created the increased value. In this approach, the value of control is treated similarly to the value of synergies; that is, the benefit belongs to the entity that creates the benefit.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1247442_code711466.pdf?abstractid=1244665&mirid=3