Insights from Practice

OCTOBER 30, 2019

Stock Prices and Fair Value

The catalyst for this program was the Delaware Supreme Court’s decision in Aruba and its treatment of share market price as evidence of fair value. Participants in the program, which was held at the Penn Club in New York, all contributed insights based on extensive experience on the subject. The program highlighted the particular advantages of an interdisciplinary approach by drawing upon insights from finance, investment banking and law and highlighting the very different approaches these disciplines take to the determination of fair value. The discussion leaders began by introducing the Aruba opinion and the legal definition of “fair value.” The program then examined the meaning of market prices and debated the extent to which market prices reflect a pro rata share of present value of anticipated free cash flows, acquisition potential, or potential misappropriation or tunneling by controllers. Discussion next addressed the relationship of control premiums to fair value and debated whether such premiums reflect “hidden value,” voting control, or simply the fact that the supply curve of stocks is upward sloping. The group then considered whether and why using share market prices to measure fair value requires a search for an “unaffected” stock price, and whether a SEPTEMBER 25, 2018 Through their transactional advice and published writings, the three members of this panel, Peter Atkins, Arthur Fleischer and Martin Lipton, are legendary because they shaped board responses to the new phenomenon of unsolicited tender offers in the 1980’s, and the Delaware courts' evaluation of those board responses on what was essentially a precedential blank slate. These panelists addressed the questions of whether the Delaware courts and legislature achieved an optimal level of director accountability, appropriately weighed the interests of investors and other constituencies affected by takeover bids, sensibly promoted reliance on independent directors, and helpfully shaped the dynamics of how bidders and targets negotiate merger agreements. The panel’s discussion focused, in particular, on the development of the poison pill (shareholder rights plan) and its impact on merger and acquisition practice. “clear day” stock price is “unaffected.” The discussion concluded with a focus on the problems stemming from the chronological gap between the date of the “unaffected” market price and the valuation date (merger date), and concern that intervening events may undermine the use of unaffected market price. Possible responses were identified, such as constructing a pro forma stock price based on broad market and/or sector performance between deal announcement and closing, and taking interim earnings announcements and other new company-specific information into

moderator Jill E. Fisch, Saul A. Fox Distinguished Professor of Business Law, University of

Pennsylvania Carey Law School

discussion leaders Itay Goldstein, Joel S. Ehrenkranz Family Professor, Professor of Finance,

The Wharton School Lawrence A. Hamermesh, Executive Director, Institute for Law and Economics,

University of Pennsylvania Carey Law School Gaurav Jetley, Managing Principal, Analysis Group Mark Lebovitch, Bernstein Litowitz Berger & Grossmann LLP Jennifer Muller, Managing Director, Houlihan Lokey David M. Silk, Wachtell, Lipton, Rosen & Katz

Did Delaware Get It Right or Mess Up in Addressing the Takeover Boom of the 1980’s?

account. moderator Lawrence A. Hamermesh, Executive Director, Institute for Law and Economics,

University of Pennsylvania Law School

panelists Peter A. Atkins, Skadden, Arps, Slate, Meagher & Flom LLP Arthur Fleischer, Fried, Frank, Harris, Shriver & Jacobson LLP Martin Lipton, Wachtell, Lipton, Rosen & Katz

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1 Richard Smith, Holland & Knight, LLP; Mark Lebovitch, Bernstein Litowitz Berger & Grossman LLP; Itay Goldstein, The Wharton School; Lawrence Hamermesh, University of Pennsylvania Carey Law School; Dan Lee, Moelis.

2 Eric Klinger-Wilensky, Morris, Nichols, Arsht & Tunnell, LLP; Joseph Frumkin, Sullivan & Cromwell, LLP; Jill Fisch, University of Pennsylvania Carey Law School; Peter Welsh, Ropes & Gray LLP.

3 Gaurav Jetley, Analysis Group.

4 Peter Atkins, Skadden, Arps, Slate, Meagher & Flom LLP; Martin Lipton, Wachtell, Lipton, Rosen & Katz; Arthur Fleischer, Fried, Frank, Harris, Shriver & Jacobson LLP.

5 Jennifer Mulller, Houlihan Lokey.

6 Lawrence Hamermesh, University of Pennsylvania Carey Law School; Dan Lee, Moelis; David Silk, Wachtell, Lipton, Rosen & Katz; Raymond DiCamillo, Richards, Layton & Finger, P.A.; Charles Korsmo, Case Western Reserve University School of Law; Matthew Gage, Houlihan Lokey.

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