In a new post by the Harvard Law School Forum on Corporate Governance and Financial Regulation, Professor Albert Choi (Virginia Law School) and Professor Eric Talley (Columbia Law School) present their new working paper, which asks how best to measure “fair value” in an appraisal proceeding.

Applying principles of game theory and auction design, the authors show that as a general matter, setting the appraised value at merger price (using a so-called MP rule) “depress both acquisition prices and target shareholders’ expected welfare relative to both an optimal appraisal rule and several other plausible alternatives.”  The authors argue that the MP rule is the functional equivalent of nullifying the appraisal right altogether.

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