Market Based Factors as Best Indicators of Fair Value
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-09-14
Three recent Delaware Court of Chancery appraisal decisions offer a wealth of guidance not only regarding the determination of a merger partner’s fair value, but also regarding elements that potentially undermine a quality sale process and strategic considerations for litigating valuation and sale process issues.
Statutory appraisal litigation, initiated after virtually every sizeable merger, requires the Delaware Court of Chancery to determine the fair value of a target company’s shares, exclusive of any merger-created value, as of the effective date of the merger. Though the appraisal statute broadly empowers the Court to consider “all relevant factors” in determining fair value, the Delaware Supreme Court has clarified the particular importance of certain market-based factors, namely, unaffected market price and merger consideration. Though the unaffected market price is an “important indicator” of fair value (so long as the stock is trading in an efficient market), deal price that is the product of “a robust market check will often be the most reliable evidence of fair value[.]”