Vice Chancellor Glasscock issued yesterday this AOL ruling on reconsideration, lowering his prior $48.70 determination to $47.08 — going farther below the $50 merger price — on the basis that he had overvalued one of AOL’s pending transactions in his DCF analysis.

The court prefaced its ruling by expressing its displeasure at both parties having moved for reargument, which the court found “rarely efficient or productive” and “encourages run-on litigation.”  Underscoring that point, the court found that “[u]nlike revenge, justice is a dish that is best served warm.”

The court otherwise declined to revisit its prior determination on the other pending transaction and declined to decrease to 3.25% its prior use of a 3.5% perpetuity growth rate: “I may have gotten it wrong, but that is a matter for appeal, not reargument.”

The Delaware Court of Chancery just issued two new appraisal rulings:

  1. Solera (C. Bouchard): the Court awarded merger price less synergies, which comes out to 3.4% below deal price; we have previously reported on the Solera case here; and
  2. Norcraft (V.C. Slights): the Court awarded a premium of 2.5% above deal price, relying on a DCF analysis and expressly rejecting a valuation based on merger price less synergies.

Both opinions adhered to the Supreme Court’s Dell and DFC rulings, although Norcraft held that despite those decisions, a merger price ruling was not warranted on the facts of that case.  Also, both cases rejected unaffected stock price as a measure of fair value based on their respective records.  The Solera opinion can be found here, and the Norcraft opinion can be found here.

**This firm is one of the counsel of record for petitioners in Solera.

Does appraisal arbitrage create costly uncertainty for a putative corporate buyer?  In The Cost of Appraisal Rights: How to Restore Certainty in Delaware Mergers, 52 Ga. L. Rev. 651 (Winter 2018), the author argues that the well-established ability to alienate voting interest from equity interest with common stock opened the door to appraisal arbitrage – and that either a legislative, or a market plumbing solution, could ameliorate corporate buyers risks when entering into a merger.  We’ve covered before how deal lawyers and others must factor in the possibility of appraisal when looking at a transaction (perhaps even more so when a transaction involves insiders, has a poor process, or otherwise does not comply with shareholder-protective standards) – here, the author proposes solutions.

First, a legislative change to the appraisal holding requirement is proposed: require appraisal seeking shares to be continuously held from the record date.  Second, structurally, move the securities recording system from one of fungible bulk to actual share tracing through a system of centralized recording.  (Note: We’ve written before about how blockchain solutions, which can be centralized or decentralized, could affect appraisal).

To briefly recap and oversimplify what these changes seek to ‘solve’:  The vast majority of stock in the United States is held in “fungible bulk” by the Deposit Trust Clearing Corporation (DTCC).  Fungible bulk means that one share cannot be differentiated from another share.  If a company issued 1,000 shares of stock – any given one of those thousands shares is ‘fungible’ with any other given share – and they are held by DTCC in ‘bulk’ – meaning not assigned to a specific (even individual) beneficial owner, but rather in bulk lots assigned to certain nominees, brokers, etc.

Setting aside the wisdom (or lack thereof) of this system, the result is that it is a metaphysical impossibility, generally, to show that any particular share of stock voted for or against a merger (or abstained).  The result is that a share purchased after the record date may well be one of the (again, this is metaphysical – the shares cannot be differentiated) shares that voted against the merger (or abstained), and thus, it carries appraisal rights.  This becomes an issue only if more shares seek appraisal than could have possibly voted against the merger or abstained.

The author’s changes here would certainly restrict appraisal arbitrage; as we’ve discussed before, structural solutions that allow for actual share tracing could make for all kinds of changes to corporate governance and shareholder rights (including appraisal).  Delaware courts — as well as the legislature — have rejected efforts to import a share-tracing requirement in Delaware appraisal.

The press release by Arca Capital, which previously announced it is pursuing appraisal with respect to AmTrust Financial, highlights a basic question in appraisal: How public are the proceedings?

As an initial matter, you do not need to be as public as Arca.  The appraisal process starts with a series of letters to ‘perfect’ your appraisal rights – and that occurs between you, your lawyers, and the relevant brokers and nominees.  Then, you need to demand appraisal – a step that involves contacting the company.  From there, paths can diverge.  One may file an appraisal petition; but if you do not, the Company must file one by statute (keep in mind, appraisal is not technically adversarial – its why many of the case names are “In re: the appraisal of” and not X v Y).  And at times, you can ‘tag along’ on appraisal because someone else filed a petition, but you properly sought appraisal.

At some point your name will become public – appraisal proceedings, like the vast majority of American court proceedings, occur in the public domain.

But even then, not every part of an appraisal proceeding will be public.  Companies, and investors, have an interest in preserving the confidentiality of their documents and analyses, and Courts often allow confidentiality stipulations and orders, as well as a variety of mechanisms to keep private information private.

The possible impact of blockchain based shareholder governance, including shareholder voting, has been a hot topic in recent years. We’ve covered a number of potential intersections between blockchain and corporate governance (including appraisal) before. Professor Christopher Brunor of the University of Georgia reviews a recent scholarly proposal for blockchain based shareholder governance in this recent piece. While appraisal changes represent only a small portion of the possible changes blockchain based governance could bring, it also is an area where the fault lines between the old – fungible bulk – system appear and are perhaps most likely to be litigated. Pre-blockchain governance cases dealing with fungible bulk may have little application in a post-blockchain governance world; but that also depends on what kind of blockchain governance structure one adopts. In other words, appraisal is a likely place where blockchain governance will face litigation that affirms (or negates) the underlying premises of much of this scholarly attention.

Two bidders have sought to buy Florida based Perry Ellis – one group of reported ‘insiders’ connected to management, and then an outside company, Randa.  Besides the inherent interest of multi-bidder scenarios for an investor considering appraisal, both sides of this – increasingly chippy – fight have invoked appraisal as part of promoting their bids.  It’s a curious development.

The Perry Ellis special committee, in announcing that it found the slightly lower priced management bid to be better invoked appraisal, writing that Randa’s bid would not have appraisal rights – as opposed to the management connected bid, which would.  Randa responded that Florida law allows appraisal in insider-related transactions, but not for transactions (like Randa’s bid, according to Randa) that do not involve insiders.  What’s odd about invoking appraisal in one’s assertion that a certain bid is better than another is that appraisal generally (and in Florida, does) require that one vote against, or at least not vote for the transaction.  In theory, yes, the insider connected bid here carries appraisal rights for those dissatisfied with the deal, as opposed to Randa’s (higher) bid which does not carry appraisal.  One might imagine, though, that an investor voting against the lower, management connected bid, would actually cite Randa’s bid as showing a higher value.  In effect – the policy reason why the insider bid carries appraisal rights is basically exactly what is occurring: to protect a minority shareholder from having to take a price lower than what a competing bidder would pay.  On the other hand, one can readily read the special committee statement as invoking appraisal in order to demonstrate that it considered factors – such as the remedies available to a minority, dissenting shareholder – even beyond the benefit to “yes” voters.

We’ve written before about Florida appraisal, and this deal shows that appraisal is, and remains, a potential remedy outside of Delaware.

While Delaware isn’t the only state offering appraisal rights, not all of the remaining 49 states are appraisal-equal. New Jersey offers very little in terms of shareholder appraisal rights.

N.J.S.A. 14A:11-1 provides a general proposition that shareholders have a right to dissent from corporate actions, but then it enumerates several restrictions. Mirroring Delaware law, New Jersey law includes a market-out exception for mergers, denying shareholders appraisal rights if the shares are listed on a national exchange or held by 1,000 or more shareholders. N.J.S.A. 14A:11-1(a)(i)(A).  Whereas Delaware has an exception to the exception allowing for appraisal for deals involving part or all cash, New Jersey’s market-out exception is absolute; it explicitly denies appraisal rights on deals where the shareholder receives cash, shares, or securities listed on a national exchange or held by more than 1,000 shareholders, or a combination of the two. N.J.S.A. 14A:11-1(a)(i)(B). New Jersey further provides that whether or not the holder possesses shares in the surviving corporation, there are no appraisal rights where the merger did not require a shareholder vote pursuant to law. N.J.S.A. 14A:11-1(a)(ii)-(iii). The law also disallows appraisal rights for substantial asset sales or exchanges not in the regular course of business that meet the same circumstances stated regarding mergers. N.J.S.A. 14A:11-1(1)(b). Like in Nevada, however, these are all default rules, and the certificate of incorporation can provide otherwise. N.J.S.A. 14A:11-1(4).

Of course, valuation–the cornerstone of appraisal–does not require an appraisal case to be critical. In Holiday Medical Center, Inc. v. Weisman, 2010 WL 5392840 (N.J. Sup. Ct. App. Div. Nov. 17, 2010), the Appellate Division dealt with the proper valuation of fair market value rather than appraisal rights in general. A 5 percent shareholder dissented from the sale of a nursing home for $8 million. The contracted sales price included $3,275,464.87 to pay off the existing mortgage, $2,895,060.45 would be returned to the purchaser as a charitable donation, and the company would ultimately net $2 million to be disbursed to the shareholders. The trial court appointed an independent appraiser that provided two different valuations for the facility: one was a going-concern value of $5.54 million, and the other had a liquidation value of $7 million. The trial court accepted the going-concern value as the proper way to value the facility, but it used this value instead to corroborate the $8 million total sale price, finding the value was based on a good-faith, arm’s-length transaction subject to the business judgment rule. Granting great deference to the trial court’s determination, the Appellate Division found no error in the trial court’s accepting the going-concern value as the proper way to determine the fair value or in the trial court’s relying on the contracted sales price to determine the fair value in this particular transaction. Further, the plaintiff shareholder had received only 80 percent of her expected share of the sales proceeds, and the company had since become insolvent. Once the trial court found the plaintiff was entitled to an additional $17,000, it also found she was entitled to pursue a constructive trust against the money from the sale distributed to the defendant directors of the company to recoup the balance of her interest.

Appraisal in New Jersey is available in limited instances, likely involving small, closely held companies, and one can expect New Jersey courts to apply systems of valuation like any other–even without an oft-used appraisal regime.

*** We thank Timothy Nichols, summer law clerk and student at Seton Hall Law School, for his contributions to this post.

Appraisal is a creature of statute, including in the Cayman Islands. Cayman appraisal has become a notable topic recently, with major decisions coming down from the Cayman courts and an uptick in investors using the appraisal remedy. Similarly, authors writing about Delaware have noted that quasi-appraisal is getting traction. Do the two have a meeting point?

The Cayman Financial Review provides an answer. Yes, the quasi-appraisal remedy exists in the Caymans; yes, much like in Delaware, it would require more than just an undervaluation of the company to access it–a violation of disclosure requirements, for example. As the authors note, a failure to provide sufficient disclosures frustrates shareholders’ ability to seek appraisal in the first place–leaving them with a post-merger quasi-appraisal remedy.

But the Cayman story does not end there; because of the somewhat unique way most Cayman companies involved in appraisal proceedings are structured, a Cayman quasi-appraisal case seems unlikely. This is because the kinds of Cayman companies at issue are usually held by shareholders who in turn hold ADS–American Depository Shares (or Securities). In other words, they are not actually shareholders of the Cayman company but instead hold an IOU security in the U.S. that can be converted to a Cayman registered security.

As the authors explain in more detail:

One potential impediment to obtaining either form of relief from a breach of the relevant duties however arises from the fact that the minority shareholders in these companies hold their interests in the form of ADSs. All such holdings must be converted into registered shares in the company before any entitlement to assert shareholder rights will be recognized by the Cayman courts, i.e. pending conversion, as a matter of Cayman Islands law, such persons are not actually considered shareholders of the company at all. This is likely to preclude most of the minority shareholders of the companies which have recently been taken private from pursuing any claim for quasi-appraisal relief, since it is unlikely that they will have converted their ADSs to registered shares without having intended to exercise dissent rights and pursue payment of fair value.

Compounding this is an enforcement issue. Unlike appraisal, where at least one still has the stock at issue, quasi-appraisal is a purely post-merger remedy. Again, the authors set out the problem. “If the quasi-appraisal action were to succeed, the shareholder might still encounter enforcement difficulties depending on the whereabouts of the individual defendants and the location of their assets, whereas judgment in an appraisal action would fall to be enforced against the Cayman company itself, assuming that the surviving entity is not foreign, if necessary, with further assistance from the Cayman courts.”

So, will we see quasi-appraisal cases in Cayman? These authors suggest there’s still a chance, but the hurdles are high, and the better course of action remains statutory appraisal.

Subject to the need to convert their ADSs to registered shares, where minority shareholders have been misinformed or misled into accepting a merger price which is well beneath fair value and giving up their rights to dissent, they may accordingly be able to obtain compensation from those responsible for their loss in a quasi-appraisal action. However, the considerably better course for a minority shareholder who is in any doubt as to the fairness of the merger price remains, again, subject to converting its ADSs to registered shares, to exercise its right to dissent from the merger and to demand to be paid fair value for its shares.

Although Delaware dominates when it comes to appraisal (as a result of its outsize attractiveness to U.S. companies as a place of incorporation), appraisal is not limited to the First State. As we’ve previously discussed, appraisal regimes also exist in other states including Massachusetts, Arizona, and Nevada. What about the Hawkeye State?

As a threshold matter, Iowa appraisal is limited by the market-out exception, and Iowa appraisal rights are not available if the target is traded in an organized market and has at least 2,000 shares and a market value of $20 million. Iowa, however, follows the Revised Model Business Act’s exception to the market-out exception (this “exception to the exception” is a common feature of appraisal regimes), allowing for appraisal rights with respect to publicly traded targets in interested transactions. See Iowa Code § 490.1302.

Like in Delaware, the Iowa appraisal statute requires a court to determine “fair value” of the stockholder’s shares. In Rolfe State Bank v. Gunderson, 794 N.W.2d 561 (Iowa 2011), the Iowa Supreme Court considered the exercise of appraisal rights in Iowa. As a result of a reverse stock split, a state bank offered to pay its minority shareholders $2,000 per share of stock based on an independent valuation that applied a minority discount and a lack of marketability discount. The minority shareholders exercised their appraisal rights and demanded $2,700 per share plus interest. Pursuant to the Iowa appraisal statute, the bank paid the minority shareholders $2,000 per share plus interest and then filed a petition with the district court to determine the fair value of the shares. The Iowa Supreme Court first reviewed the need to determine fair value as part of appraisal and then dove into whether minority and lack of marketability discounts would apply, ultimately concluding they did not.

Rolfe confirms that Iowa appraisal remains available in select instances and that a merger involving a company incorporated in Iowa can trigger appraisal rights, but the market-out exception must be considered.