Merger Negotiations in the Shadow of Judicial Appraisal

The recent surge in appraisal litigation has sparked debate over the desirability of appraisal and how this remedy should be structured. Much of this debate is based on untested assertions about appraisal’s ex ante effect on the structure and pricing of takeovers. Systematically investigating this effect, we find evidence that target shareholders receive higher abnormal returns as the strength of the appraisal remedy increases. We find no evidence that bidders offer a lower up-front price as a means to pay off dissenting shareholders after a sale. Furthermore, threat of appraisal does not appear to limit takeover activity or impact the method of payment. Overall, our results suggest that appraisal provides an important ex ante protection for target-firm shareholders.