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The Appraisal Remedy in Corporate Law

Published online by Cambridge University Press:  20 November 2018

Daniel R. Fischel
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Abstract

In corporate law the appraisal remedy gives shareholders the right to dissent from types of corporate transactions and to obtain payment for their shares from the corporation. While the remedy is typically viewed as a form of protection for minority shareholders, the author argues that it is best understood as an implied contractual term that increases the value of all shares.

Type
Research Article
Information
American Bar Foundation Research Journal , Volume 8 , Issue 4 , Fall 1983 , pp. 875 - 902
Copyright
Copyright © American Bar Foundation, 1983 

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References

1 See generally Harry G. Henn & J. Alexander, Laws of Corporations and Other Business Enterprises 977–1001 (3d ed. St. Paul, Minn.: West Publishing Co., 1983); Alan Schenk & Steven H. Schulman, Shareholders' Voting and Appraisal Rights in Corporate Acquisition Transactions, 38 Bus. Law. 1529 (1983). Delaware, the most important state for purposes of corporate law because of the disproportionate number of corporations incorporated there, limits appraisal rights to certain types of merger or consolidation. Del. Code Ann. tit. 8, § 262(b) (Cum. Supp. 1982). No appraisal rights exist for shareholders dissenting from sales of asset transactions or charter amendments. Id. Appraisal rights can be provided voluntarily in any of these situations. Id. § 262(c). New York, Pennsylvania, and Ohio, by contrast, provide appraisal rights to shareholders dissenting from certain mergers or consolidations (N.Y. Bus. Corp. Law § 910(a)(1)(A) (McKinney 1963); Pa. Stat. Ann. tit. 15, § 1908(A) (Purdon Cum. Supp. 1983–84); Ohio Rev. Code Ann. § 1701.84 (Baldwin 1979)), sales of substantially all assets (N.Y. Bus. Corp. § 910 (a)(1)(B) (McKinney Cum. Supp. 1982–83); Pa. Stat. Ann. tit. 15. § 1311(D) (Purdon 1983); Ohio Rev. Code Ann. § 1701.76 (Baldwin 1979)), and charter amendments (N.Y. Bus. Corp. Law § 806(b)(6) (WcKinney Cum. Supp. 1982–83); Pa. Stat. Ann. tit. 15, § 1810 (Purdon Cum. Supp. 1983–84); Ohio Rev. Code Ann. § 1701.74 (Baldwin 1979)). The Model Business Corporation Act also provides appraisal rights in this wider range of situations. Model Business Corp. Act § 80 (1979). For a list of appraisal statutes, see 13 Fletcher Cyclopedia of the Law of Corporations § 5906.1 (Wilmette, Ill.: Callaghan & Co., 1980).Google Scholar

2 See, e.g., Del. Code Ann. tit. §, 9 262(h) (Cum. Supp. 1982); N.Y. Bus. Corp. Law § 623(h)(4) (McKinney Cum. Supp. 1982–83); Ill. Ann. Stat. ch. 32, §§ 157.70, 157.73 (Smith-Hurd Cum. Supp. 1983–84); Pa. Stat. Ann. tit. 15, § 1515(B)(Purdon 1983); Ohio Rev. Code Ann. § 1701.85(A)(2) (Baldwin 1979); Model Business Corp. Act § 81(a)(3) (1979). See generally Henn & Alexander, supra note 1, at 1002–3.Google Scholar

3 For a discussion of the different procedural requirements of different jurisdictions, see Henn & Alexander, supra note 1, at 1006–9.Google Scholar

4 . Bayless Manning, The Shareholder's Appraisal Remedy: An Essay for Coker, Frank, 72 Yale L.J. 233 (1962).Google Scholar

5 Melvin A. Eisenberg, The Structure of the Corporation: A Legal Analysis 69–77 (Boston: Little, Brown & Co., 1976).Google Scholar

6 Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983). The implications of Weinberger are discussed throughout this article.Google Scholar

7 . For a comprehensive discussion of the historical background of the appraisal remedy, see William, J. Carney, Fundamental Corporate Changes, Minority Shareholders, and Business Purposes, 1980 A.B.F. Res. J. 69.Google Scholar

8 Compare Eisenberg, supra note 5, at 75 with Manning, supra note 4, at 246–47.Google Scholar

9 See, e.g., Ernest L. Folk III, The Delaware General Corporation Law: A Commentary and Analysis 331 (Boston: Published for Corporation Service Co., Wilmington, Del., by Little, Brown & Co., 1972) (appraisal right compensation for lost veto power of minority); Voeller v. Neilston Warehouse Co., 311 U.S. 531, 535 n.6 (1941); Salt Dome Oil Corp. v. Schenck, 41 A.2d 583, 587 (Del. 1945).Google Scholar

10 For a discussion of these theories of share ownership in the history of corporation law, see Carney, supra note 7. See also George D. Gibson, How Fixed Are Class Shareholder Rights? 23 Law & Contemp. Probs. 283 (1958). For a modern expression of the vested rights theory, see Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977) (shareholder's right to continuation in form of investment precludes merger absent showing of business purpose). This aspect of Singer was overruled in Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983).Google Scholar

11 . For an elaboration of this argument, see Daniel, R. Fischel, The “Race to the Bottom” Revisited: Reflections on Recent Developments in Delaware's Corporation Law, 76 Nw. U.L. Rev. 913, 925 (1982).Google Scholar

12 Another possible solution to the prisoner's dilemma problem is competition among bidders. This is encouraged by the requirement in the Williams Act that tender offers remain open for a certain period of time. Compare Lucian A. Bebchuk, The Case for Facilitating Competing Tender Offers, 95 Harv. L. Rev. 1028 (1982) (advocating waiting periods), with Frank H. Easterbrook & Daniel R. Fischel, Auctions and Sunk Costs in Tender Offers, 35 Stan. L. Rev. 1 (1982) (arguing that waiting periods are undesirable because they decrease the value of a property right in information), and Daniel R. Fischel, Efficient Capital Market Theory, the Market for Corporate Control, and the Regulation of Cash Tender Offers, 57 Tex. L. Rev. 1 (1978) (same). Antitakeover amendments in the corporate charter are yet another possible solution to the prisoner's dilemma problem. See William J. Carney, Shareholder Coordination Costs, Shark Repellents, and Takeout Mergers: The Case Against Fiduciary Duties, 1983 A.B.F. Res. J. 341. 1 discuss antitakeover amendments infra text at notes 55–57.Google Scholar

13 See infra text at notes 91–93 for a discussion of the problems created by two-tier tender offers for appraisal proceedings.Google Scholar

14 The higher the expected value of remaining a shareholder, as a result of either participating in gains created by the bidder or receiving a high price in an appraisal proceeding, the greater the incentive of shareholders to reject the initial tender price. See Sanford J. Grossman & Oliver D. Hart, Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation, 11 Bell J. Econ. 42 (1980). To overcome this free-rider problem, the bidder will have to raise its bid and thus increase the attractiveness of the offer in comparison with the expected value of remaining a shareholder. Because each shareholder realizes that the offer might be defeated altogether if too many shareholders reject the offer, some shareholders will continue to tender even if the bid is not raised. Other shareholders, however, will require a higher price to tender.Google Scholar

15 The need for appraisal is the weakest here, however, because management can negotiate on behalf of shareholders.Google Scholar

16 If this price is too high, no offers will be forthcoming. See infra part III for the tradeoff between increasing the probability that an offer will occur and increasing the expected price per offer.Google Scholar

17 . See Michael, C. Jensen & William, H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976); Clifford, W. Smith Jr., & Jerold, B. Warner, On Financial Contracting: An Analysis of Bond Covenants, 7 J. Fin. Econ. 117 (1979).Google Scholar

18 Thus far I have ignored the effects of diversification. A shareholder with a diversified portfolio will likely have investments in bidders and targets, majorities and minorities, and preferred and common shares. Legal rules that permit appropriation of wealth will simply transfer dollars from one pocket to another. A shareholder with a diversified portfolio will not be completely indifferent to rules that facilitate such transactions, however, and will take precautions to prevent them because real resources will be consumed in bringing them about. Moreover, there will be an opportunity loss if decisions that would increase the value of the firm are abandoned in favor of decisions that attempt to transfer wealth between groups. The appraisal remedy acts as a standard form contractual provision that minimizes these costs, which represent a dead weight loss to investors and lower the value of investments.Google Scholar

19 See Smith & Warner, supra note 17, for a discussion of the role of bond covenants in reducing the divergence of interest between bondholders and shareholders and thus in increasing the value of the firm.Google Scholar

20 . Because of these costs, nonfinancial firms do not use redeemable claims as a financing device. By contrast, financial organizations such as open-end mutual funds can issue redeemable claims because financial assets (i.e., publicly traded securities) are not organization specific and can be traded with low transactions costs. See Eugene, F. Fama & Michael, C. Jensen, Agency Problems and Residual Claims, 26 J. Law & Econ. 327, 337–39 (1983).Google Scholar

21 . For similar survival arguments with respect to a range of practices, see Carlton, Dennis & Daniel, R. Fischel, The Regulation of Insider Trading, 35 Stan. L. Rev. 857 (1983); Frank, H. Easterbrook & Daniel, R. Fischel, Voting in Corporate Law, 26 J. Law & Econ. 395 (1983); Smith & Warner, supra note 17.Google Scholar

22 The inference would be stronger if firms could contract out of an appraisal remedy provided by law. In this event, appraisal would be a standard form contractual provision that the parties could alter by agreement. I am unaware of any state law that allows parties to opt out of the appraisal remedy. Parties can, however, structure transactions in ways that either provide or deny appraisal rights. See Schenk & Schulman, supra note 1. Private attempts to increase the availability of appraisal are permitted, at least in Delaware; see supra note 1. If firms systematically provide for appraisal rights when they are not required, or structure transactions to allow for appraisal rights, this would be strong evidence that appraisal rights produce net benefits.Google Scholar

23 See Merton H. Miller, Debt and Taxes, 32 J. Fin. 261,273 (1977) (“The most, however, that we can safely assert about the evolutionary process underlying market equilibrium is that harmful heuristics, like harmful mutations in nature, will die out. Neutral mutations that serve no function, but do no harm, can persist indefinitely”).Google Scholar

24 See Ralph K. Winter, Government and the Corporation (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1978); Peter Dodd & Richard Leftwich, The Market for Corporate Charters: “Unhealthy Competition” Versus Federal Regulation, 53 J. Bus. 259 (1980); Fischel, supra note 11.Google Scholar

25 See, supra note 1.Google Scholar

26 . For a list of states that have adopted the stock market exception, see Note, A Reconsideration of the Stock Market Exception to the Dissenting Shareholder's Right of Appraisal, 74 Mich. L. Rev. 1023, 1024 n.4 (1976).Google Scholar

27 See supra note 1.Google Scholar

28 . See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701 Del. 1983); Yanow v. Teal Indus., 178 Conn. 263, 422 A.2d 311 (1979).Google Scholar

29 Manning, supra note 4.Google Scholar

30 Eisenberg, supra note 5, alone responds to Manning. While Eisenberg is correct that Manning may have exaggerated the costs of appraisal to the firm, Manning is surely correct that such costs exist. The question then becomes: Would investors in designing the optimal corporate charter incur these costs ex ante? Since Eisenberg's focus is primarily on the need to protect minority shareholders ex post, he does not provide an adequate answer to this question.Google Scholar

31 Manning, supra note 4, at 239–44.Google Scholar

32 Id. at 239.Google Scholar

33 Id. at 244 (“If a man from Mars were to read over this list of events, how would he assess their significance to the objecting shareholder and pick out those transactions so direful as to call for the extraordinary measures of the appraisal remedy? Only the most highly sophisticated Martian—or the most unsophisticated—would be able to guess what our statutes have done”).Google Scholar

34 Since appraisal provides shareholders with the value of their investment prior to the transaction dissented from, shareholders, particularly large shareholders, would have an incentive to demand appraisal whenever the value of their shares dropped.Google Scholar

35 Capital and product markets as well as the markets for managerial services and the market for corporate control all provide managers with strong incentives to maximize the value of the firm. Employment contracts and fiduciary relationships serve the same function.Google Scholar

36 . The two major anomalies are statutes that provide for appraisal rights for shareholders in mergers that are negotiated at arm's length and for shareholders of acquiring firms in some situations. Virtually all statutes provide for appraisal rights in negotiated mergers. See supra note 1. The requirement that shareholders of acquiring firms have appraisal rights is often tempered by a restriction that the right to dissent is available only if a vote is required and the action will increase the shares of the acquiring firm by more than 20%. See, e.g., Model Business Corp. Act § 80 (1979). Other ways exist to avoid appraisal rights for shareholders of acquiring firms. See Schenk, & Schulman, , supra note 1. In practice, an extremely high percentage of appraisal cases that have been litigated in reported cases involve conflicts of interest where outside shareholders have been frozen out on terms set by controlling shareholders. See Schaefer, Elmer J., The Fallacy of Weighting Asset Value and Earnings Value in the Appraisal of Corporate Stock, 55 S. Cal. L. Rev. 1031, 1032 & n.6 (1982) (citing cases).Google Scholar

37 See supra note 26.Google Scholar

38 Folk, supra note 9, at 391.Google Scholar

39 . See, e.g., Richard, M. Buxbaum, The Dissenter's Appraisal Remedy, 23 U.C.L.A. L. Rev. 1229, 1247–48 (1976); Note, supra note 26.Google Scholar

40 . See Alfred, F. Conard, Amendments of Model Business Corporation Act Affecting Dissenters' Rights (Sections 73, 74, 80 and 81), 33 Bus. Law. 2587, 2595 (1978).Google Scholar

41 Eisenberg, supra note 5, at 81.Google Scholar

42 The literature on efficient capital markets is too large to attempt to summarize. See generally Thomas E. Copeland & J. Fred Weston, Financial Theory and Corporate Policy 317–53 (Reading, Mass.: Addison-Wesley, 1983); Eugene F. Fama, Foundations of Finance: Portfolio Decisions and Securities Prices 133–68 (New York: Basic Books, 1976); James H. Lone & Mary T. Hamilton, The Stock Market: Theories and Evidence 70–97 (Homewood, Ill.: Richard D. Irwin, Inc., 1973).Google Scholar

43 . Del. Code Ann. tit. 8, § 262(k)(1) (Cum. Supp. 1982).Google Scholar

44 . For an argument that freeze-outs of minority shareholders will frequently result in gains, see Frank, H. Easterbrook & Daniel, R. Fischel, Corporate Control Transactions, 91 Yale L.J. 698 (1982).Google Scholar

45 Of course the retention of an equity participation does not eliminate the possibility of appropriation. Minority shareholders who receive $50 in value for every $100 previously held have had half of their wealth confiscated whether the consideration paid is cash or shares. My point is only that the risk that a particular transaction is designed to confiscate wealth from the minority is greatest in freeze-out situations.Google Scholar

46 See supra text at note 2.Google Scholar

47 Easterbrook & Fischel, supra note 44.Google Scholar

48 . 457 A.2d 701 (Del. 1983).Google Scholar

49 I do not consider other possible standards here such as requiring that each shareholder be compensated with (1) an amount equal to his or her subjective valuation of his or her shares even if greater than the market price or (2) with an amount equal to some percentage of the gains created by the transaction according to some formula. For a discussion of these alternatives, see Easterbrook & Fischel, supra note 44, at 726–30.Google Scholar

50 This argument is developed in the context of defensive tactics by incumbent management in response to tender offers in Easterbrook & Fischel, supra note 12.Google Scholar

51 An investor could acquire such a portfolio by, e.g., only acquiring shares in publicly traded firms where there was one shareholder who owned more than 50% of the outstanding shares.Google Scholar

52 See supra text at note 14.Google Scholar

53 An argument could be made that the tender offer would have occurred but at a lower price. The argument would be that the amount that the bidder is willing to pay for all the shares is a constant; increasing the price paid in the second step will decrease the price paid in the first step so the total amount will remain the same. If the bidder could have acquired the shares in the first step at a lower price, however, it had an incentive to do so even under the pretransaction market value standard. Requiring a greater amount to be paid in the second step, therefore, will likely cause a higher amount to be paid in the first step or cause the offer to be abandoned altogether.Google Scholar

54 . On the role of takeovers in minimizing agency costs, see Frank, H. Easterbrook & Daniel, R. Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 Harv. L. Rev. 1161 (1981).Google Scholar

55 Antitakeover charter or bylaw amendments may, for example, provide that the firm can only be acquired for a certain price, make it difficult for a successful bidder to install new directors, or require a very high shareholder vote for a second-step merger. For a discussion of the different types of antitakeover amendments, see Ronald J. Gilson, The Case Against Shark Repellent Amendments: Structural Limitations on the Enabling Concept, 34 Stan. L. Rev. 775 (1982). The role of shark repellent amendments in overcoming coordination problems of widely dispersed shareholders and thus in increasing the price paid by bidders is discussed in Carney, supra note 12. Carney, however, ignores the effects of these amendments on shareholders of the bidder and shareholders as a class.Google Scholar

56 Gilson, supra note 55. I have also made an argument for prohibition. See Fischel, supra note 12, at 30–31; Easterbrook & Fischel, supra note 54, at 1201.Google Scholar

57 Easterbrook & Fischel, supra note 54.Google Scholar

58 This may explain certain apparent anomalies such as why firms do not write corporate charters that prohibit all defensive tactics including antitakeover amendments. Compare Easterbrook & Fischel, supra note 54, at 1181 (suggesting that such charter provisions are not written because they cannot be enforced).Google Scholar

59 The possible divergence between the private and social benefits from takeover activity is emphasized in Grossman & Hart, supra note 14. Grossman & Hart exaggerate the extent of this divergence, however, because they ignore the possibility of diversification. For investors who hold shares of both potential bidders and potential targets or who cannot identify whether a particular firm is likely to be a bidder or target, there is no divergence between private and social benefits from takeover activity. See supra text at notes 49–51.Google Scholar

60 . The hypothesis that antitakeover charter amendments create private benefits but impose social costs implies that shareholders of firms that adopt such amendments should experience positive abnormal returns while all other shareholders should lose. The contrary hypothesis that antitakeover amendments serve to entrench management to the detriment of investors implies that shareholders of the affected firm and shareholders as a class should experience negative abnormal returns upon adoption. The evidence, however, is inconclusive and thus supports neither hypothesis. Compare DeAngelo, Harry & Edward, M. Rice, Antitakeover Charter Amendments and Stockholder Wealth, 11 J. Fin. Econ. 329 (1983) (stockholders experience negative returns but not statistically significant) with Scott, C. Linn & John, J. McConnell, An Empirical Investigation of the Impact of ‘Antitakeover’ Amendments on Common Stock Prices, 11 J. Fin. Econ. 361 (1983) (stockholders experience positive but not statistically significant returns). In light of the absence of any evidence that these amendments have any effect, there does not appear to be a need for a legal rule prohibiting their adoption.Google Scholar

61 . See, e.g., Bell v. Kirby Lumber Corp., 413 A.2d 137 (Del. 1980); Universal City Studios v. Francis I. duPont & Co., 334 A.2d 216 (Del. 1975); In re Delaware Racing Ass'n, 213 A.2d 203 (Del. 1965). The block method has also been used in other jurisdictions. See, e.g., Florsheim v. Twenty Five Thirty Two Broadway Corp., 432 S.W. 2d 245 (Mo. 1968); Brown v. Hedahl's-Q B & R. Inc., 185 N.W. 2d 249 (N.D. 1971); Fogleson v. Thurston Nat. Life Ins. Co., 555 P.2d 606 (Okla. 1976). Some jurisdictions, particularly New York, have relied more heavily on market price as presumptively controlling. See, e.g., In re Marcus, 273 App. Div. 725, 79 N.Y.S. 2d 76 (1948); Application of Behrens. 61 N.Y.S. 2d 179 (Sup. Ct. 1946), aff'd 271 App. Div. 1007, 69 N.Y.S. 2d 910 (1947). But see In re Endicott Johnson Corp. v. Bade. 37 N.Y. 26 585, 376 N.Y.S. 26 103, 338 N.E. 2d 614 (1975) (deemphasizing the importance of market price).Google Scholar

62 Weinberger v. UOP, Inc., 457 A.2d 701, 712–13 (Del. 1983).Google Scholar

63 . For general discussions of the Delaware block method, with citations to cases, see Folk, , supra note 9, at 3424, 380–88; Warren, E. Banks, Measuring the Value of Corporate Stock, 11 Cal. W.L. Rev. 1, 26–31 (1974); id., A Selective Inquiry Into Judicial Stock Valuation, 6 Ind. L. Rev. 19, 20–27 (1972).Google Scholar

64 See supra text at note 42.Google Scholar

65 Delaware courts have consistently rejected reliance on market price as the exclusive measure of value. The leading case is Chicago Corp. v. Munds, 20 Del. Ch. 142, 172 A.452 (1934). Many federal cases have held, however, that the market price of a publicly traded security is the best evidence of its value. See Seaboard World Airlines v. Tiger Int'l, 600 F.2d 355, 361–62 (2d Cir. 1979); Mills v. Electric Auto-Lite, 552 F.2d 1239,1247–48 (7th Cir.), cert. denied, 434 U.S. 922 (1977); In re New York, N.H. & H.R.R., 632 F.2d 955, 962–63 (2d Cir. 1980); Amerada Hess Corp. v. Commissioner of Internal Revenue, 517 F.2d 75, 82 (3d Cir.), cert. denied, 423 U.S. 1037 (1975); Susman v. Lincoln Am. Corp., No. 73-C-1089 (N.D. Ill. Jan. 9, 1984); In re LTV Securities Litigation, 88 F.R.D. 134 (N.D. Tex. 1980).Google Scholar

66 See infra text at notes 77–80.Google Scholar

67 The basic principles of valuation are discussed in Richard Brealey & Stewart Myers, Principles of Corporate Finance 61–83 (New York: McGraw Hill, 1982).Google Scholar

68 New York has recently amended its appraisal statute to provide that the court, and not appointed appraisers, should determine the value of shares. N.Y. Bus. Cop. Law § 623(h)(4) (McKinney Cum. Supp. 1982–83). The obvious implication is that the costs of hiring experts exceed the benefits from increased accuracy in valuations.Google Scholar

69 See, e.g., Universal City Studios v. Francis I. duPont & Co., 334 A.2d 216 (Del. 1975); Sporborg v. City Specialty Stores, 123 A.2d 121 (Del. Ch. 1956).Google Scholar

70 See, e.g., Universal City Studios v. Francis I. duPont & Co., 334 A.2d 216 (Del. 1975); David J. Greene & Co. v. Dunhill International, 249 A.2d 427 (Del. Ch. 1968).Google Scholar

71 . The classic statement of the effect of debt on the value of the firm is Modigliani, Franco & Merton, H. Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, 48 Am. Econ. Rev. 261 (1958).Google Scholar

72 . See, e.g., Lynch v. Vickers Energy Corp., 429 A.2d 497, 505 (Del. 1981) (asset value important because “oil was (and is) a limited and much needed energy source which significantly affected its value as a corporate asset”); Bell v. Kirby Lumber Corp., 413 A.2d 137 (Del. 1980).Google Scholar

73 It is necessary to distinguish those situations where gains are created by the elimination of the minority (agency costs reduced, reporting requirements eliminated, etc.) from other situations where the gains exist whether or not the minority is eliminated. In this latter class of cases, elimination of the minority prior to realization of the gain can be viewed as a usurpation of a corporate opportunity. On this distinction, see Easterbrook & Fischel, supra note 44, at 721.Google Scholar

74 . See, e.g., Tri-Continental Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950); Sporborg v. City Specialty Stores, 123 A.2d 121, 126 (Del. Ch. 1956).Google Scholar

75 . See, e.g., Zahn v. Transamerica Corp., 162 F.2d 36 (3d Cir. 1947); Lebold v. Inland Steel Co., 125 F.2d 369 (7th Cir. 1941).Google Scholar

76 . See Harry DeAngelo, Linda DeAngelo & Edward, M. Rice, Going Private: Minority Freezeouts and Stockholder Wealth, 27 J. Law & Econ. (forthcoming 1984). For a summary of the evidence on the division of gains between acquired and acquiring firms, see Michael, C. Jensen & Richard, S. Ruback, The Market of Corporate Control: The Scientific Evidence, 11 J. Fin. Econ. 5 (1983).Google Scholar

77 . The market model has been widely used to study the effect of a particular event such as a merger or regulatory change on the stock prices of affected firms. For a survey, see William Schwert, G., Using Financial Data to Measure Effects of Regulation, 24 J. Law & Econ. 121 (1981). For an application to securities fraud cases, see Daniel, R. Fischel, Use of Modem Finance Theory in Securities Fraud Cases Involving Actively Traded Securities, 38 Bus. Law. 1 (1982).Google Scholar

78 . For examples of how regression analysis can be used in legal proceedings, see Franklin, M. Fischer, Multiple Regression in Legal Proceedings, 80 Colum. L. Rev. 702 (1980).Google Scholar

79 The beta of a stock is a measure of the sensitivity of its returns to movements in the market as a whole. By definition, the beta of a portfolio of the market is 1. The beta of a risk-free asset is 0.Google Scholar

80 See Fischel, supra note 77.Google Scholar

81 The recent amendments to the New York appraised statute appear to codify this same standard. See N.Y. Bus. Corp. Law § 623(h)(4) (McKinney Cum. Supp. 1982–83) (court directed to “consider the nature of the transaction giving rise to the shareholder's right to receive payment for shares and its effects on the corporation and its shareholders, the concepts and methods then customary in the relevant securities and financial markets for determining fair value of shares of a corporation engaging in a similar transaction under comparable circumstances and all other relevant factors”).Google Scholar

82 Book value is an accounting concept determined by how assets and liabilities are recorded on a balance sheet. It need not have any relationship to economic value.Google Scholar

83 Del. Code Ann. tit. 8, § 262(h) (Cum. Supp. 1982).Google Scholar

84 Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983).Google Scholar

85 Id.Google Scholar

86 Consider, e.g., the statement in Weinberger that the size of premiums paid in other acquisitions is relevant evidence in appraisal proceedings. This will have the effect of decreasing the probability of value-increasing acquisitions with low premiums going forward to the detriment of shareholders of firms that would have been taken over as well as shareholders of bidders and shareholders as a class. Imagine, e.g., an offer by firm A to acquire all of the shares of firm A for $100 when they were previously selling at $75. Assume that the premium paid in other acquisitions is 50%. This transaction, which would benefit shareholders of firms A & B, would be abandoned if all dissenters could claim that the premium of 33% was “unfair”.Google Scholar

87 . See, e.g., Brudney, Victor & Marvin, A. Chirelstein, Fair Shares in Corporate Mergers and Takeovers, 88 Harv. L. Rev. 297 (1974); Victor Brudney, Efficient Markets and Fair Values in Parent Subsidiary Mergers, 4 J. Cop. Law 63 (1978); id., Equal Treatment of Shareholders in Corporate Distributions and Reorganizations, 71 Calif. L. Rev. 1072 (1983).Google Scholar

88 See Easterbrook & Fischel, supra note 44 (arguing that shareholders' welfare is maximized if those that produce the gains are allowed to keep as much of them as possible).Google Scholar

89 Shareholders of acquiring firms do somewhat better in tender offers than in mergers. For a summary of the evidence, see Jensen & Ruback, supra note 76.Google Scholar

90 The market model is superior to analysis of premiums in other acquisitions for determining how much of the gains was received by the shareholders of the acquired firm because it is more exact. There is no reason why premiums should be consistent across acquisitions. Assume, e.g., that in a given acquisition the acquired firm's shareholders receive virtually all of the gains but the premium paid is less than the average. Presumably the court in Weinberger did not intend to hold that an acquisition is only “fair” to shareholders of the acquired firm if shareholders of the acquiring firm lose.Google Scholar

91 . See Theodore, N. Minis, Two-Tier Pricing: Some Appraisal and “Entire Fairness” Valuation Issues, 38 Bus. Law. 485 (1983). For an economic defense of two-tier tender offers, see Easterbrook, & Fischel, , supra note 44, at 727.Google Scholar

92 Delaware courts have held that the price paid in the first step is not relevant for analyzing the adequacy of the price in the second step. See Bell v. Kirby Lumber Corp., 413 A.2d 137 (Del. 1980); Gibbons v. Schenley Industries, 339 A.2d 460 (Del. Ch. 1975); In re Olivetti Underwood Corp., 246 A.2d 800 (Del. Ch. 1968); Sporborg v. City Specialty Stores, 123 A.2d 121 (Del. Ch. 1956). These cases are discussed in Mirvis, supra note 91.Google Scholar

93 The same reasoning applies to tender offers where there is a prompt second-step merger even if not explicitly announced at the time of the tender offer.Google Scholar

94 If a shareholder does seek appraisal, the amount paid should again not be a function of the relative amounts of the first and second tiers of the offer. This can be accomplished by subtracting the premium that shareholders were entitled to receive in the fist step from pretransaction market value. In other words, if pretransaction value is $75 and a bidder offers 120 for the first 50.01 % of the shares and $80 for the remainder, each shareholder has the opportunity to receive $120 for half of his or her shares. The premium of $45 ($120 - $75) × the greater of 50.01% of shares owned should be offset against pretransaction market value. The higher the premium paid in the fist step, the higher the offset. If the premium paid in the first step is sufficiently high (i.e., if the amount offered is in excess of $150 in the above example), a shareholder electing appraisal will owe money. This result will no doubt strike many as odd, but it is intended to prevent shareholders from simultaneously receiving the benefit of a transaction in the form of the premium paid and getting a windfall by dissenting from the same transaction. Preventing the receipt of this windfall will discourage free riding and opportunistic behavior by shareholders and will thus increase the probability of value-increasing transactions to the benefit of shareholders generally.Google Scholar

95 . See generally Vorenberg, James, Exclusiveness of the Dissenting Stockholder's Appraisal Right, 77 Harv. L. Rev. 1189 (1964).Google Scholar

96 Stauffer v. Standard Brands, 187 A.2d 78 (Del. 1962); David J. Greene & Co. v. Schenley Industries, 281 A.2d 30 (Del. ch. 1971).Google Scholar

97 . 380 A.2d 969 (Del. 1977).Google Scholar

98 . 429 A.2d 497 (Del. 1981).Google Scholar

99 Recisionary damages in this context allow a plaintiff to recover the value of the shares given up in a merger where value is calculated either at the time of the merger itself or at the time the damage award is made.Google Scholar

100 For a more detailed critique of Singer and Lynch, see Fischel, supra note 11, at 923–35. See also Easterbrook & Fischel, supra note 44, at 723–25 (criticizing Singer).Google Scholar

101 . Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del. 1983).Google Scholar

102 Id at 714.Google Scholar

103 On the distinction between property and liability rules, see Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972). See also Richard A. Posner, Economic Analysis of Law 27–64 (Boston: Little Brown & Co., 1977); A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 Stan. L. Rev. 1075 (1980).Google Scholar

104 R. H. Coase, The Problem of Social Cost, 3 J. Law & Econ. 1 (1960).Google Scholar

105 . In addition to the references in note 98 supra, see Frank, H. Easterbrook & Daniel, R. Fischel, Antitrust Suits by Targets of Tender Offers, 80 Mich. L. Rev. 1155, 1166–71 (1982).Google Scholar

106 . Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983). See, e.g., Model Business Corp. Act § 80(d) (1979) (appraisal remedy not exclusive when corporate action taken is “unlawful or fraudulent” with regard to complaining shareholder or to corporation); N.Y. Bus. Corp. Law § 623(h) (McKinney 1963 & Cum. Supp. 1982–83) (appraisal remedy not exclusive where corporate action is unlawful or fraudulent as to complaining shareholder).Google Scholar

107 In practice, different jurisdictions vary widely in their treatment of these issues. See Henn & Alexander, supra note 1, at 1007–8.Google Scholar