While the vast majority of United States appraisal rights cases occur in Delaware, several other states — Florida among them — also recognize appraisal rights.  This past summer, a Florida appellate court affirmed a minority shareholder’s right to exercise appraisal rights when the company sought to redeem its shares.  In Omes v. Ultra Enterprises, Inc., 2017 WL 3611546 (Fla. Dist. Ct. App. Aug. 23, 2017), directors of Ultra Enterprises, which owns the intellectual property of the Ultra Music Festival, voted to redeem the shares of Alex Omes, one of Ultra’s co-founders, due to Omes’ self-dealing and competing personal businesses.  Ultra notified Omes of the board’s decision and his right to seek appraisal to determine the value of his shares.  Omes exercised his appraisal rights, rejecting Ultra’s valuation of $1,200 per share, and instead offering his own countervaluation of $111,111.11 per share.

After a bench trial, the trial court found that the appraisal process was properly invoked.  In a turnabout of the more conventional use of appraisal, the appellate court observed that a majority shareholder has a right to engage the appraisal process “to eliminate the rights of dissenting shareholders and put an end to corporate strife.” The court ultimately determined that Ultra’s valuation analysis was supported by competent, substantial evidence.  The case demonstrates that appraisal rights are indeed available in Florida, and we are continuing to watch out for additional rulings outside Delaware, as we posted about yesterday.

We’ve already seen other states apply their own appraisal statutes; we’ve covered Nevada before, for example.  We’re now also seeing other courts look to Delaware courts for the tools and methods behind valuation methods as well, not only in appraisal actions.  Thus, for example, an Arizona appeals court has cited Delaware appraisal cases in adjudicating the complex fraud and breach of fiduciary claims before it.

In Kottayil v. Insys Therapeutics, Inc., 2017 WL 3712196 (Ariz. Ct. App. Aug. 29, 2017), Arizona’s Court of Appeals upheld the discounted cash flow analysis employed by the trial court to award a minority shareholder a higher valuation than the company had determined in resolving the shareholder’s breach of fiduciary duty claim.

A minority shareholder of Insys had challenged Insys’ reverse stock split and Insys’ prior debt-to-equity conversion as diluting his shares.  After a bench trial to decide the shareholder’s breach of fiduciary duty claim, the trial court determined that the share price for the debt-to-equity conversion was fair but the reverse stock split was not.  In determining the fair value of the reverse stock split, the trial court found that traditional valuation methods proved unreliable and that the best approach was to define a range of values instead.  The trial court set the low end of the range at $53.2 million, based on discounted cash flow analyses performed by third parties between 2004 and 2009, and the high end of the range at $151.5 million, based on IPO valuations.  The trial court ultimately awarded the minority stockholder damages based on a valuation of $151.5 million, the highest value in that range.  The Court of Appeals upheld the trial court’s ruling, finding that the discounted cash flow analyses the trial court relied upon for both the debt-to-equity conversion and the reverse stock split used reasonable inputs and methodology.

In discussing the valuation analysis, the appellate court found that valuation is not purely a matter for experts and that valuations by the company could be relevant to the determination as well, citing the well-known Delaware Dole decision.  The appellate court also cited Delaware appraisal law in rejecting certain discounts to fair-value analysis that the parties urged the court to consider.

Delaware appraisal continues to impact other courts’ determinations of valuation approaches throughout the country and outside the US as well.

The Delaware Supreme Court made its ruling this week in the ISN Software appraisal case.  A three-judge panel (not the full bench) affirmed the Chancery Court’s decision awarding a premium that was more than 2.5 times the merger price, as reported in Law360 [$$].  The Supreme Court affirmed without rendering its own opinion, relying instead on the trial court’s reasoning.  ISN Software was a privately held software company, with the appraisal case stemming from the controlling stockholder’s cash-out of some of the minority shares.

We have previously posted on the Chancery decision here, and have posted on the Supreme Court oral argument here.

Seekingalpha has published this piece, “Appraisal Rights: Nontraditional Shareholder Activism” by Aberdeen Asset Management.  In this post, Aberdeen recounts the increase in appraisal in this decade, and focuses on how investors have sought to realize additional returns in the appraisal process.  Aberdeen then highlights the risks, including legislative risks (which we have covered before) in noting that appraisal is “as much of a legal strategy as it is an investment strategy” and in noting that proper appraisal experience is important to evaluating any appraisal opportunities.

As reported in Law360 [$$], on October 11, 2017 the Delaware Supreme Court heard argument appealing the Chancery Court’s ruling in the ISN Software appraisal case.  We have previously posted on the trial court’s decision here, in which Vice Chancellor Glasscock awarded a premium to the merger price.  The Supreme Court did not rule and did not indicate when it would do so.  You can see the complete oral argument here (under the October 11, 2017, listing; ISN Software v. Ad-Venture Capital).  Unlike the Dell and DFC Global arguments, the Supreme Court did not convene en banc – that is, with a full five-justice proceeding – and instead conducted argument by a three-justice panel, which did not include the Chief Justice.

We will continue to monitor the docket and post when the ruling is issued.

Lexology’s Federal Securities Law Blog has this analysis of the recent article we posted about, the High Cost of Fewer Appraisal Claims.  The author, from Porter Wright in Ohio, notes that the recent data on appraisal claims dispel certain arguments made by the anti-appraisal crowd. In particular, he writes, “Prior to the 2016 amendments, many proponents of limiting appraisal rights argued that shareholders who invoke their appraisal rights negatively affect non-dissenting shareholders; their thought being that buyers in transactions routinely withhold giving their highest, top-dollar bid due to the risk that some of the buyer’s money will have to be used later to defend against appraisal litigation . . . [but], if this theory was true, then deal premiums would have increased after the 2016 amendments.”  The recent research suggests this may not be the case.

The analysis concludes with an appeal to states outside Delaware considering appraisal legislation or that have appraisal laws: “Regardless of sophisticated investors using the appraisal arbitrage strategy, perhaps having expansive appraisal rights actually benefits target shareholders in the long run? Due to the study’s findings, it might be best if other states take a wait-and-see approach to better understand the impact of Delaware’s amendments before they follow suit.”

As reported today in Law360 [$$], the Delaware Supreme Court heard argument yesterday on the chancery court’s ruling in the Dell appraisal case.  The court did not render its decision and did not indicate when it would do so.  We’ll continue to monitor the docket and post when the ruling comes down.

** Note: this law firm is one of the counsel of record in the Dell case.

The Harvard Law School Forum on Corporate Governance and Financial Regulation posted yesterday on Merger Negotiations in the Shadow Judicial Appraisal.  In this post, Professors Brian Broughman, Audra Boone, and Antonio Macias address the explosion in merger litigation over the past decade and present their empirical study testing the competing explanations of the ex-ante effect of appraisal litigation on M&A activity.  As reported in their study, their evidence implies that “appraisal remedies afford important protection for minority shareholders” during their sample period.

In light of blockchain stock ledgers coming to Delaware, commentators and news outlets are starting to take notice. Recently, Bloomberg has covered the idea of stock ledger blockchain, as has the Financial Times [$$]. The core difference between any possible blockchain stock ledger and the existing system would be the likely elimination of the concept of fungible bulk. A blockchain, or at least some iterations of a blockchain, would allow a diligent researcher to potentially trace a “share” (or whatever one unit may be called) through each transaction, each wallet, or each address, back to issuance/mining/founding. This may not necessarily be an easy process–but as it stands currently, such a process is truly impossible. The “shares” held by, for example, a prime broker, are non-differentiated (hence the idea of fungible); they are not individual “units.” Blockchain share ledgers would have implications for “naked” short selling, corporate governance, securities litigation, derivative actions, and, relevant here, appraisal. As reporters are observing, blockchain may also reduce transaction costs associated with M&A activity. This remains a development likely to generate continued interest going forward.