The Impact of Modern Finance Theory in Acquisition Cases

In February of 1983, the Supreme Court of Delaware decided Weinberger v. UOP, Inc. The case holds that, in determining the present value of a corporation involved in an acquisition, courts are free to use “any techniques or methods [of valuation] which are generally considered acceptable in the financial community…” The rule in Delaware prior to Weinberger required courts to determine the present value of a corporation by use of the Delaware block method of valuation exclusively. The Delaware block method, however, is a poor way to determine the present value of a corporation. As a result, even before the Weinberger decision, commentators had sharply criticized the methodology, and Delaware courts occasionally had strayed from a rigid application of this mandated valuation method. The Weinberger opinion, therefore, offered a welcome opportunity to move away from this tired and unsound valuation methodology. Courts, it seemed, were encouraged to develop a new common law of valuation, one that was informed by sensible, modern finance theory. This article examines the extent to which courts in corporate acquisition cases have, since the date of Weinberger, incorporated modem finance theory into their decisions. The data that are the focus of the article are derived from seventy-six decisions rendered after Weinberger. The cases involve corporate acquisitions where shareholders either exercised their appraisal rights or challenged the acquisition under fiduciary duty rules, and courts, as a result, were required to determine the value of the corporation or the shareholders’ proportionate interest in the corporation. The conclusions from the data are not very encouraging. In short, courts since Weinberger have, to a significant extent, failed to base their opinions on modem finance theory. For example, the data indicate that courts in only about one-third of their opinions relied on the discounted cash flow valuation methodology, the valuation method broadly accepted in modem finance theory. The data show that other inappropriate and unsound methodologies, such as the weighted average method and asset valuations, continue to be used in a large percentage of all decisions. Part I of the article offers a brief overview of modem present value theory, which in turn furnishes a framework for the exposition of the data and the subsequent critical evaluations and prescriptions that are offered. Part II of the article describes five categories of valuation methodologies used in this piece to classify the data. With these foundations laid, Part III presents the data regarding courts\u27 valuation methodologies utilized in cases decided after Weinberger. And, finally, Part IV offers interpretations and explanations of the data and suggests how courts might facilitate a transition to judicial resolutions that are more in line with modem finance theory