3.3.3.2.2 Group coordination

Professor Fischel advances a convincing and meaningful justification for the appraisal remedy.1 Fischel believes that appraisals can prevent a clever bidder from benefiting himself as a result of shareholders' lack of coordination. He cites the famous prisoner's dilemma and presents an example. Suppose a bidder applies a two tier arrangement to a corporation whose shares are selling at $50. He first announces a tender offer which pays $60 for 51% of the shares and at the same time offers $30 for the remaining shares in a squeeze out merger. Even though the average of his offer is $45, $5 below the actual selling price, this offer may somehow succeed because no coordination exists among the shareholders, so each shareholder will try to maximize his interests and rationally accept $60 for fear of being lelt at a disadvantage, thus leaving the remaining shareholders worse off as a class. If one shareholder could represent the shareholders as a whole in the price negotiations, this two tier transaction scheme would be rejected. Fischel takes the appraisal remedy as a solution to this prisoner's dilemma because it can discourage the substantially low price in the second step in the transaction and ensure the remaining shareholders a fair value. This remedy can therefore protect all shares from a "value reducing transaction".

Undoubtedly, this theoretical insight convincingly justifies the significance of the appraisal remedy. Nevertheless, I think, it is not a purpose in itself. It reiterates the function of exit at fair value and helps to explain how the appraisal remedy works to ensure a fair value in certain transactions.