Stock Market Value and Deal Value In Appraisal Proceedings

This Essay considers two methods of valuing public companies in the context of appraisal proceedings under section 262 of the Delaware General Corporation Law (DGCL). The first method relies on the efficient capital markets hypothesis (ECMH) and values the company based on the market price of its shares before any public disclosure of the possibility of a transaction (the unaffected market price). The second relies on the price that an unrelated party agrees to pay to acquire the company in a transaction negotiated at arm’s length after a robust sales process by the selling board (the deal price). Both the unaffected market price and the deal price are determined by market forces, albeit in different markets: with the unaffected market price, the relevant market is the stock market generally, while with the deal price, the relevant market is the market for corporate control.

The deal price is almost always much higher than the unaffected market price, commonly thirty to fifty percent higher. Each valuation method raises technical legal issues under the statutory language of section 262, and although such issues are often important in appraisal proceedings, I shall largely set them aside. My purpose is to explore why two different market prices diverge so significantly and systematically and to determine what in general this implies for the use of the two prices in Delaware appraisal proceedings.