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May 27, 2013 4:44 pm
Appraisal rights: the
oracle speaks
Having
judges opine on value is perilous, but might be satisfying and
entertaining in the case of Dell
It is said that corporate
valuation is an art. But would it not be satisfying if occasionally it
could be scientific, as if proclaimed by an oracle? In this world our
oracle is the Delaware state court, which is empowered to declare a
definitive valuation in so-called appraisal hearings. Think of
appraisal hearings as a chance to have your school algebra exam
remarked. Disgruntled shareholders in an
M&A deal that closes in spite of their objection can have a judge
set a binding value for their shares. The dissenter is entitled to
that decreed price along with 5 per cent annual interest (meaningful
in the current environment) for time elapsed since closing. The
exercise of appraisal rights is rare given the risk (the judge can set
a lower value than the deal price), timing (often years) and expense
(hiring advisers and expert witnesses), but is increasingly prominent.
Aggrieved shareholders have broached it as a remedy in the recent
Dell and
Clearwire battles.
Like anything involving hedge
funds, appraisal is a complex dance. Threatened appraisal can move a
bidder to boost its offer (as
Sprint has done in Clearwire) because the bidder does not want the
uncertainty of having to pay a holdout more money years down the road.
And the appraisal proceeding involves intense scrutiny of valuation
that digs into such esoterica as equity risk premium calculations.
A standard route for objecting
shareholders in M&A has been suing boards of directors for breach of
fiduciary duty. This process has been exposed as a sham where
plaintiffs’ lawyers get a few hundred thousand dollars for more text
added to the merger proxy but shareholders get no more actual money.
Having judges opine on value instead of markets and boards is
perilous. But now and then getting a definitive answer, even from a
judge, in controversial situations such as
Dell would be satisfying and entertaining.
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© The Financial Times Ltd 2013 |
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