According to Article 12 of the Business Mergers and Acquisitions Act, shareholders who object to an M&A transaction and vote against or abstain from voting may request the company to buy back their shares at fair price.  If no agreement can be reached between the company and the dissenting shareholders on the buyback price, a court ruling may be sought.  The purpose of the appraisal right, according to the court, is not to enable the dissenting shareholders to obtain a benefit or suffer a detriment as a result of the M&A by the company, but merely to objectively reflect the reasonable shareholding interests at the time of the M&A.^[1]  Therefore, how the fair price should be calculated is the key issue.

Currently, the calculation of fair price in practice is mainly based on the Statement of Valuation Standards issued by the Accounting Research and Development Foundation.  The income approach, asset-based approach and market-based approach are commonly used for valuation.  The income approach is a method of discounting and grossing up the income generated from a company's operations, and is represented by the discounted cash flow method.  The asset-based approach is based on the total value of the company's assets as the value of the company.  The market-based approach includes comparable transaction method, comparable company method and market price method.  The first two are evaluated on the basis of the transactions or the companies that are similar to the subject of evaluation.  The market price method is based on the market price of the subject of valuation.  In addition to the above financial methodology, the commercial court has held that if the merger price is determined upon adequate process and negotiation by the parties and is thus able to reflect all the information available to the company at the time of the M&A, the merger price may also be used as a basis for determining fair price.^[2]

Whether to include synergies and control premium is a common dispute in the calculation of fair price.  Regarding synergies, the commercial court has already indicated that the acquirer can create synergies by expanding market share, vertical integration, or mitigating risks through diversification after the M&A.  Therefore, the acquirer often acquires targets with synergies at the above-market strategic prices and creates strategic M&A premiums.  Since the dissenting shareholders have objected the deal with the intention that their investments should not be affected by such deal, the dissenting shareholders are not allowed to claim benefit from the synergies arising therefrom.  In addition, the value of synergies will be reflected in the company's operations only after the transaction is completed.  The basis of the fair price of the buyback shares requested by the dissenting shareholders was the date of the shareholders' meeting, at which time the value of synergies has not yet been incurred.  The value of synergies could in no way be included into the calculation of fair price.^[3]

As for the control premium, the commercial court has held that in determining whether a control premium should be included, the court may consider whether there is an enterprise value deriving from the controlling shareholders that would result in a reduction in agency costs.  If there are controlling shareholders and such enterprise value did exist, the control premium should be shared by all shareholders.^[4]  If the control premium were to be included, whether a separate adjustment is required in the valuation depends on the valuation methodology involved.  For example, the market price method and the comparable company method are based on the prices on the stock exchange market which are derived from the trading without controlling interest.  Therefore, the control premium should be added when evaluating the subject with controlling interest.^[5]

It can be seen that the determination of fair price involves the operation of delicate legal and valuation concepts.  There are no standardized answers for different cases with different conditions.  It is advisable to make prudent arrangements at the transaction planning stage to minimize subsequent legal risks.

(The article is originally in Chinese which can be found here.)