An Analysis of When the Merger Price is the Best Representation of Fair Value in an Appraisal Action

Abstract

Delaware’s statutorily afforded right of appraisal is once again a hot topic. In an appraisal action, the Delaware Court of Chancery is charged with the task of determining the fair value of recently acquired Delaware corporations. However, the appraisal process is not an easy one due, in no small part, to the inflexible statute guiding the appraisal procedure. The process is further complicated by the Delaware Supreme Court’s mandate that the Court of Chancery not to employ a bright line test in determining the fair value even for those transactions that were the result of a free and open market process. As a result, the courts are often left second guessing a merger value that was the product of a fair merger process.I propose that in an arms-length third-party cash-out merger, the entire fairness standard of review is the appropriate standard to determine fair value within an appraisal action. A statutory safe harbor allowing the judiciary the opportunity to examine the process by which the target company and acquiring company arrived at the final merger value versus questioning the substance of the merger would serve the M&A and shareholder community well.In the absence of a legislative fix, the Court of Chancery has, at the least, provided buyers, sellers, and arbitrageurs alike, with scenarios that will likely result in the court determining that the merger price is in fact the best representation of fair value. Essentially, when the inputs typically used by the court for determining fair value are in some way flawed, the court will likely conclude that the merger price is the best representation of fair value.