Fairness from a Financial Point of View in Acquisitions of Public Companies: Is Third-Party Sale Value the Appropriate Standard
![handle is hein.journals/busl36 and id is 1539 raw text is: Fairness from a Financial Point of View in
Acquisitions of Public Companies: Is Third-Party Sale
Value the Appropriate Standard?
By LEONARD CHAZEN*
INTRODUCTION
A perennial issue in acquisitions of public companies is whether the
financial terms are fair to the acquired company shareholders. While there is
no single prevailing test of financial fairness today, courts reviewing the
fairness of acquisitions by controlling shareholders generally seek to assure
that acquired company shareholders receive cash or securities which are at
least the substantial equivalent in value of the shares they surrender in the
transaction;' and the courts tend to look to the stock market prices of the
acquired company shares as the primary, though not the exclusive, measure of
the preacquisition value of the acquired company shares.' Recently claims
have emerged for a new standard of financial fairness. An acquisition is not
fair from a financial point of view, it is said, unless the price paid for the
acquired company shares is within the range of prices its shareholders would
have received if the company had been sold, as an entirety, to another
unaffiliated purchaser (third-party sale value). Linked to the third-party
sale value standard is the idea that there is a range of fairness based on the
range of prices shareholders might obtain if proposals to buy the company
were sought from other potential purchasers. In the recent merger and
*Member of the New York bar.
I. Sterling v. Mayflower Hotel Corp., 33 Del. Ch. 293, 93 A.2d 107, (Del. Sup. Ct. 1952);
David J. Greene & Co. v. Dunhill Int'l, Inc., 249 A.2d 427 (Del. Ch. 1968); Harriman v. E.i.
DuPont de Nemours & Co., 411 F. Supp. 133 (D. Del. 1975), [1975-76 Trans. Binder] Fed. Sec.
L. Rep. (CCH) 95,386; Brudney & Chirelstein, Fair Shares in Corporate Mergers and
Takeovers, 88 Harv. L. Rev. 297 (1974); Nathan and Shapiro, Legal Standards of Fairness of
Merger Terms under Delaware Law, 2 Del. J. Corp. L. 44 (1977). Weinberger v. UOP, Inc., Civ.
Act. No. 5642 (Del. Ch. 1981 ) suggests that shareholders may be entitled to some premium over
the preacquisition value of their shares on account of the benefit to the controlling shareholder of
obtaining 100% ownership of the company.
2. Mills v. Electric Auto-Lite Co., 552 F.2d 1239 (7th Cir.), cert. denied, 434 U.S. 922
(1977); Seaboard World Airlines, Inc. v. Tiger Int'l;/ Inc., 600 F.2d 355 (2d Cir. 1979); Gibbons v.
Schenley Industries, Inc., 339 A.2d 460 (Del. Ch. 1975); Leighton v. American Tel. & Tel. Co.,
397 F. Supp. 133 (S.D.N.Y. 1975); In re Marcus, 273 A.D. 725, 79 N.Y.S.2d 76 (1948), affd,
302 N.Y. 881, 103 N.E.2d 338 (1951); Harriman v. E.l. DuPont de Nemours & Co., supra n. I
(asset value is primary measure for investment company); and cases cited in n. 28, infra (market
value may be unreliable because market is thin or excessively influenced by expectations of
acquisitions).
3. Statement by Martin Lipton in Chazen, Friedman, Feuerstein, Premiums and Liquidation
Values: Their Effect on the Fairness of an Acquisition in Eleventh Annual Institute on Securities
Regulation 143, 162-63 (Fleischer, Lipton and Stevenson, eds.); Bell v. Kirby Lumber Corp., 413
A.2d 137, (Del. Supr. 1980).
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