Academic journal article Journal of Corporation Law

The Fair Value of Cornfields in Delaware Appraisal Law

Academic journal article Journal of Corporation Law

The Fair Value of Cornfields in Delaware Appraisal Law

Article excerpt


The Delaware Supreme Court's opinions in Weinberger and Technicolor have left a troublesome uncertainty in defining the proper approach to the valuation of corporate shares. That uncertainty-increasingly important as going private mergers become more frequent-can be resolved by a blend of financial and doctrinal analysis. The primary problem, the potential opportunism by controlling shareholders in timing going private mergers, can be addressed by a more complete understanding of corporate finance. The definition of fair value must include not only the present value of the firm's existing assets, but also the future opportunities to reinvest free cash flow, including reinvestment opportunities identified, even if not yet developed, before the merger. This issue has been incompletely articulated by the courts. On the other hand, value created by the merger that can only be achieved by means of the merger itself-such as reduced costs of public company compliance-should not be included in determining fair value. We also show that except in the case of acquisitions by third parties (where actual sale value, minus synergies, is a useful measure of fair value), hypothetical third-party sale value does not and should not ordinarily be taken as a measure of fair value.


The Weinberger1 decision in 1983 revolutionized appraisal law, and like many revolutions left an array of messy puzzles that persist to this day. One was its dictum concerning the statutory prohibition against including gains from mergers in calculating the fair value of the firm in appraisal.2 Despite the literal clarity and breadth of the statutory prohibition, the court opined that the exclusion is "a very narrow exception to the appraisal process, designed to eliminate use of... projections of a speculative variety relating to the completion of the merger."3 It was not until Technicolor4 that both the Delaware Court of Chancery and the Delaware Supreme Court addressed the Weinberger ruling and its tension with the literal language of the statutory exclusion. While the court of chancery attempted to resolve that tension,5 the supreme court rejected the Chancellor's reasoning and reaffirmed its earlier ruling, without providing much guidance for resolving the uncertainty as to the scope of the statutory valuation exclusion.6

The issue is a significant one. Appraisal is becoming an increasingly important remedy7 in light of the growth of going private mergers,8 the fact that appraisal is the exclusive remedy in short-form mergers after Classman,9 and the growing use of tender offers as the mechanism of choice for completing a merger.10 In all these cases, it is the squeeze-out cash merger (along with the mergers involving a close corporation) that gives rise to most of the appraisal cases. What then to make of the supreme court's ruling in Weinberger? What types of gains that occur after such a merger can be included in valuing a firm in appraisal? Is the line drawn between "speculative" and "nonspeculative" gains, as the court suggested,11 or should the line be drawn differently?

The issue has not received much concentrated attention from academic researchers. Perhaps the main exception, for our purposes, is Professor Coffee's 1996 article.12 In that article he stated that in squeeze-out mergers, gains resulting from the controller's use of inside information should be included in calculating the fair value of the firm, while other merger gains should not.13 In concluding, Coffee said that the courts should be attentive to the "hidden cash flows" that result from inside information.14 Although Coffee's analytical structure has been of some help to the courts,15 the fact that the recommendation turns on hidden cash flows renders it less useful in its actual application.

In addition, there is a small literature that touches on a broader issue: whether the appropriate standard in appraisal should be going concern value (the standard applied by the court) or one of two alternatives, third-party sale value or market value. …

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