Rationalizing Appraisal Standards in Compulsory Buyouts

Abstract

This Article argues that the "going concern value" standard adopted by the Delaware courts as the measure of "fair value" in share valuation proceedings is superior, in both fairness and efficiency, to its two main competitors, market value and third-party sale value. That superiority, however, depends upon two propositions. First, going concern value must be measured in a way that includes not only the present value of the corporation's existing assets, but also the present value of the reinvestment opportunities available to and anticipated by the firm at the time of merger. Second, going concern value should not include the value of corporate control where the merger creates control through the aggregation of previously dispersed shares. In that case, the benefits created by the aggregation of shares belong to the party that created the increased value. Where a pre-existing, controlling shareholder squeezes out the minority, however, the minority shareholders are especially vulnerable to an acquisition at a price that fails to reflect the firm's going concern value. Where such a controller fails to present a valid discounted cash flow analysis, it deprives the minority shareholders and the court of access to projections of future free cash flows of the firm. In this situation, the courts should adopt a penalty default presumption that fair value includes the value of control as reflected in comparable company acquisitions. This presumption comports with common law doctrines of fiduciary duty and the entire fairness standard, as well as adverse evidentiary inferences drawn from failure to produce relevant evidence. The controller, as faithful fiduciary, can avoid the proposed presumption by preparing and submitting to judicial scrutiny a valid, discounted cash flow analysis. The opportunistic controller, on the other hand, is subjected to a fair value determination that amounts to third-party sale value minus synergies.