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If you don’t get your way in M&A, try court

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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 re-marked. 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 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.

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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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