We’ve written before about the follow-on decision from Solera* which found that an appraisal claim can count as a “securities claim” for D&O policy purposes – see Lowenstein’s alert on the topic. Coverage of that decision continues.

*Lowenstein Sandler was counsel to petitioners in the underlying Solera appraisal case.

We’ve covered before how drag-along provisions and other contractual provisions can involve the waiver of appraisal rights. Recent caselaw from Delaware has made it clear that in at least some instances, a contractual waiver of appraisal rights is enforceable.

In particular, the Authentix decision, discussed at length by various authors here (law firm), here (law firm), here (blog), and here (legal blog), held that at least in the circumstances in that case, involving sophisticated parties represented by counsel, where the parties were fully informed, and the agreement unambiguously waived appraisal rights, the contractual waiver would be enforced. The Court did not lay out which of these factors were necessary or sufficient.

Harvard Law’s Corporate Governance Blog notes that Authentix may be contrasted with a decision also from Delaware, In re Altor BioScience Corporation. There, an ambiguous provision that defendants contended waived appraisal rights (along with breach of fiduciary duty claims). The Court enforced the alleged waiver of the fiduciary duty claims, but did not find that the covenant not to sue barred appraisal claims. Notably, the Court held that without an express and affirmative waiver of appraisal rights, the waiver could not be enforced as appraisal is a statutory right.

As we have noted before, getting the basics right is important in the world of appraisal. For example, if appraisal rights are available to shareholders, then an appraisal notice must get that right. Simpler still, as an article in Forbes reminds readers, in any M&A transaction, whether appraisal rights exist and whether shareholders need to be notified should be considered.

This is especially true as the existence of appraisal rights is a jurisdiction-specific, and sometimes fact specific (and transaction specific) inquiry. We’ve noted before that while appraisal rights may exist in one jurisdiction, and not in another, jurisdictions may also differ on the kinds of transactions offering appraisal rights, and even on whether the buyer’s shareholders get appraisal rights.

In any M&A transaction, consideration of appraisal rights should be on the checklist.

Germany has some forms of appraisal rights – depending on whether the squeeze-out method was used against minority shareholders, and what form that method took. German law offers three squeeze-out methods: one contained in the WPUG (German takeover law which implemented the European Takeover Directive and the squeeze-out right included in the Directive), another contained in the General Stock Corporation Act, and another contained in the German Transformation Act.

  • The first squeeze-out right contained in the WPUG, which implements the Takeover Directive, allows a bidder who, after the launch of a takeover offer or mandatory offer, acquires 95% of the total issued share capital to acquire the remaining shares for fair consideration. In this case we are dealing solely with listed companies.  There are detailed rules about the form and level of the compensation. The squeeze-out procedure is very detailed, with specific price requirements. The squeeze-out is carried by court order, thus making it more difficult to challenge.
  • Another form of squeeze-out right is contained in the Stock Corporation Act. It applies to both listed and unlisted stock corporations (AG- Aktiengesellschaft). It is available to shareholders exceeding 95% of the share capital. The majority shareholder can acquire the remaining shares against payment of an appropriate compensation. The execution of the squeeze-out is decided by the general meeting of shareholders. Shareholders can challenge the resolution of the general meeting in court and also challenge the appropriateness of the compensation in court (this form of appraisal right would more closely resemble U.S. judicial appraisal proceedings).
  • The final squeeze-out method is contained in the German Transformation Act, which was introduced in order to simplify parent-subsidiary mergers. A shareholder directly owning 90% or more of the share capital of the target company can implement a merger squeeze-out under the German Transformation Act. The target company is merged into its parent entity and the minority shareholders are squeezed out, requiring “adequate” cash consideration when the merger is completed. This more resembles the cash-out merger found in the US.  There needs to be a shareholder resolution which can be challenged by shareholders.

**Lowenstein Sandler thanks Dr. Alexandros L. Seretakis, Assistant Professor in Law at the Trinity College Dublin-The University of Dublin, for this post.  Lowenstein Sandler LLP does not practice in Germany or the EU.

Our article “Fair Value of Minority Shares in a Closely Held Company” published in the December 2018 issue of the New Zealand Business Law Quarterly examines the New Zealand law and judicial decisions on the notion of fair value for minority shares. Specifically, the article focuses on a closely held or unlisted company and considers whether fair value of a minority stake should incorporate a discount from the pro rata value of the company’s equity considered as a whole.

In general, the universal principle is that fair value has to be equitable to the acquirer and the vendor, recognizing what the seller gives up in value and what the buyer receives through the share acquisition. However, in New Zealand, fair value is not a single valuation standard but a contextual assessment. The context and applicable constitutional New Zealand Companies Act requirements influence whether a discount ought to apply in determining the fair value for minority shares.

While the baseline position is that fair value may include a discount for minority interest there are contexts in New Zealand in which a discount would not apply. One is where a company’s constitution prescribes a formula to determine fair value and this is a pro rata value of the total value. Where a company’s constitution provides for an expert to determine fair value without being explicit on whether a discount applies, then the expert will have discretion in the decision.

In cases where directors are dealing in shares and have material inside information, section 149 of the New Zealand Companies Act of 1993 is relevant, and court decisions suggest a nuanced approach to the question of whether a minority discount applies. A minority discount may apply where the transaction is an open market consensual transaction and information relevant to the value of the shares has been disclosed. However, no discount is likely to apply in the case of a closely held company where shareholders have fallen out, or where the company constitution gives a minority greater than usual rights.

The New Zealand Companies Act of 1993 also considers fair value where minority buyout rights apply, and where a shareholder is oppressed, unfairly discriminated against, or unfairly prejudged. The Companies Act of 1993 and the court decisions typically conclude that fair value in these contexts is a pro rata value exclusive of a discount for minority shares.

These contextual applications aim to minimize positional bias and information asymmetry among specified participants.

*Lowenstein Sandler thanks Jai Basrur, John Land, and Jilnaught Wong of the University of Auckland Business School for their contribution to this blog. Lowenstein Sandler LLP does not practice in New Zealand.

The National Law Review has covered Mobile Posse, a case we’ve posted on before.  The NLR analysis describes the Mobile Posse decision, writing:

“The Court denied all but one of defendants’ motions, finding numerous deficiencies in the notice process and finding that the merger was not entirely fair.”

And further:

“The Court was not persuaded that a supplemental notice could serve as a replicated remedy, and in any event, the supplemental notice contained incorrect and internally inconsistent instructions. The supplemental notice provided stockholders with an incorrect time period for submitting their demand for appraisal, and it also provided the stockholders with the wrong procedures for enforcing their appraisal rights.”

Mobile Posse highlights an important aspect of Delaware appraisal rights, different from many other types of claims.  Whereas an (alleged) tortfeasor is obviously under no duty (usually) to inform others of their potential claims, appraisal is not a tort remedy, but a statutory right.  For appraisal, one can view it as: shareholder have the right to a fair notice that gives them the information they need to make an informed decision.  Setting aside debates about what information the shareholder needs, shareholder certainly have the right to a correct notice – and it can create issues if the company fails to provide one.

A recent alert by Lynda Bennett and Jason Meyers in Lowenstein’s Insurance Recovery Group discusses the Delaware Superior Court’s recent opinion that a “Securities Claim” in a D&O policy includes a shareholder appraisal action and coverage for prejudgment interest despite lack of insurer consent. Read the alert here.

Commentary on the recent Jarden decision has focused, unsurprisingly, on the use of unaffected stock price in the decision after some commentators viewed the methodology as dead after Aruba.  As a recap, unaffected stock price methodology involves determining the fair value of an acquired company using its stock price before the merger announcement.

Some commentary on Jarden:

But the National Law Review had a somewhat different take, cautioning against viewing one data point as the (re)start of a trend, writing “In general, Jarden demonstrates that, in statutory appraisal actions, the Court’s determination of fair value will remain primarily a fact-intensive inquiry involving consideration of different valuation methodologies, as appropriate.”

Blog World of Securities Regulation has this extensive breakdown of the recent Columbia Pipeline decision. The author notes that the Columbia Pipeline analysis goes through each factor, or sub-analysis, that the Delaware courts have considered relevant (to varying degrees) in appraisal proceedings recently. These include:

  • Sales process;
  • Deal price (and the reliability of it);
  • Synergies;
  • Signing-closing valuation increase;
  • Trading price (which the Court rejected);
  • The discounted cash flow methodologies of petitioners and respondents.

The post provides a comparatively short synopsis of an otherwise one-hundred-plus page decision.