Brattle Principal Bin Zhou and Boston University Professor Dirk Hackbarth have authored a two-part paper series for Law360 on the relevance of market price in measuring fair value.
Recent appraisal decisions by the Delaware Supreme Court and Chancery Court have reignited the debate regarding the role of market evidence (deal prices and market prices) in meeting Delaware fair value standards. The article series, “When and How Is Market Price Relevant for Appraisal Remedy,” answers fundamental questions related to the reliability of market price and other factors to be considered in assessing fair value.
The authors argue that the market price is unequivocally relevant in determining fair value if the target companies’ stocks are actively traded and there is no controlling shareholder. Delaware courts have frequently rejected market price as evidence of fair value due to their notion of an implicit minority discount in the stock price; however, empirical evidence suggests that minority discounts are often negligible or non-existent for U.S. traded stocks in general. In addition to market price, the authors acknowledge that adjusted deal prices and discounted cash flow (DCF) estimates may also be informative of fair value under various circumstances. The reliability of market price as indicator of fair value should be evaluated against its own merits, and against the merits of other fair value measures. In particular, in deciding the best indicator of fair value, adjusted deal prices and DCF estimates are subject to human errors and judgement.
According to the authors, courts should rely more on market price in fair value appraisal for actively traded target stocks with no controlling shareholder. In relying more heavily on market price as fair value, market efficiency, an aspect that has been absent in prior case evidence, must be evaluated and considered. In addition to the standard tests of market efficiency used in securities litigation, the authors propose the examination of a company’s liquidity and market microstructure, corporate governance, and accounting transparency relative to peers and the general stock market.
Both articles can be viewed using the links below.