The Harvard Law School Forum on Corporate Governance and Financial Regulation has published a post by authors Professor Yair Listokin and Mr. Inho Andrew Mun, regarding corporate law in a financial crisis. Reviewing the crisis in 2008 and the rescue mergers that occurred, the authors propose that during a financial crisis, corporate law changes–in particular with respect to mergers. By replacing voting rights with appraisal rights, the authors propose that the efficiency gains pre-merger, whereby crisis actors would be able to move with more alacrity and fewer technical issue holdups, would be balanced by the protection of shareholder rights post-merger: by appraisal.

The authors certainly hit upon a basic reality: Appraisal rights remain a viable protection for shareholder interests and rights, and are one of the few post-merger remedies that exist. The authors’ idea to apply what would effectively be “super-appraisal” in a crisis–collapsing pre-merger remedies into the post-merger appraisal remedy–is certainly an innovative suggestion.

The article is available here.

Some authors have noted that appraisal has become the disciplining remedy for the fiduciary duties of corporate managers. This may be true, regardless of the fact that appraisal is an independent and distinct remedy from fiduciary duty litigation. But sometimes the two are inextricably bound.

In late February 2018, the Delaware Supreme Court handed down a decision in Appel v. Berkman, No. 316, 2017, 2018 WL 947893 (Del. Feb. 20, 2018), wherein stockholder-plaintiffs brought an action against the corporate directors of Diamond Resorts, alleging breaches of fiduciary duties with respect to merger disclosures. In Appel the plaintiff alleged that, pre-merger, Diamond failed to disclose to shareholders the concerns of the board chairman (and founder of the company), who was also abstaining on the merger itself–what the Supreme Court described as “no common thing.”

In discussing the importance of the disclosures, the Court observed that the “founder and Chairman’s views regarding the wisdom of selling the Company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal …” And further, it observed that the lack of the disclosure in this case was not inactionable just because the stockholder plaintiff tendered his shares–concerns outside the disclosures, such as the costs of litigation and the fact that capital can be tied up in appraisal (subsequently mitigated in some respects by legislative changes providing for prepayment), may well motivate a shareholder.

Here we have an example of disclosure litigation and appraisal being intertwined. While appraisal is a post-closing remedy, and thus a shareholder seeking appraisal does so after the merger and with whatever disclosures were made as they are, the Supreme Court recognizes that the disclosures themselves, if fulsome and sufficient, may motivate investors to seek appraisal. When those disclosures are deficient, one of the impacts may be denying investors who have rightful appraisal remedies a fair chance to decide.

See the decision in Appel here.

In the Columbia Pipeline Group appraisal case, as reported in Law360 [$$], Vice Chancellor Laster rejected the stockholders’ request to stay or, in the alternative, extend the fact discovery deadline for 2 months pending the appeal of the Aruba Networks ruling.  The court stated in its March 7 ruling that the shareholders should have known from the outset of the case that Columbia Pipeline’s market price “would be a factor” in the proceedings, and that the Aruba decision did not introduce anything new, “whether as a matter of doctrine or for purposes of the parties’ case strategy or trial tactics.”

The court also contrasted the stay request put before it to that in Aruba Networks, where the same judge did stay proceedings pending the Supreme Court’s decision in DFC Global.  The court’s rationale was that the Aruba proceedings had been nearly completed, and the DFC appeal had been argued, with a ruling expected within 90 days, thus warranting a stay.  In Columbia Pipeline, by contrast, the parties are in the midst of discovery, and the Aruba appeal has not yet even been taken given the pendency of a motion for re-argument before the trial court.

Matt Schoenfeld of Burford Capital has produced a pre-Aruba  piece: “Form Corwin to Dell: The Cost of Turning a Blind Eye”, that discusses the potential impact of recent Delaware Supreme Court rulings in Dell and other cases.

The SSRN abstract is below:


This essay considers the ramifications of the Delaware Supreme Court’s December 2017 Dell appraisal decision within the context of Delaware’s more sweeping clampdown on shareholder litigation protections in recent years, beginning with Corwin in 2015.

While the Delaware Supreme Court rejected the “judicial gloss” of a formalized deal price rule in Dell, the gloss has, for all intents and purposes, been applied. The appraisal remedy had already been enfeebled in recent years by a slew of at-or-below deal price rulings, but Dell’s promulgation of a de facto procedural safe harbor marks a more systematic curtailment.
The efficacy, as well as the public policy coherency, of Dell is tied to the notion that procedural “best practices” lead to, or are reflective of, fair dealing. Unfortunately, this is often not the case because the actors who are most likely to be conflicted are also the ones most likely to be in control the narrative presented in public-facing materials, particularly amid a broader boardroom shift—the “lone-insider” effect—which has undermined the monitoring capabilities of independent directors.
In addition to lower deal premia and higher agency costs, the primary effects of Delaware’s post-2015 effort to dull shareholder defenses, culminating in Dell, will likely be: 1) faster CEO pay growth, and 2) more M&A and higher industry-specific measures of concentration, which research has shown to contribute to declining competition, lower levels of labor market mobility, wage stagnation, and increasing inequality in the United States.

On Friday, Vice Chancellor Glasscock issued his ruling in the AOL appraisal case. The court first set out to determine whether the merger transaction was “Dell Compliant,” which the Court defined to be “[w]here information necessary for participants in the market to make a bid is widely disseminated, and where the terms of the transaction are not structurally prohibitive or unduly limiting to such market participation.”  Where those factors are present, “the trial court in its determination of fair value must take into consideration the transaction price as set by the market.”  The Court then concluded, however, that the deal process in AOL was not “Dell Compliant” and relied entirely on a discounted cash flow analysis to award petitioners $48.70, or 2.6% below merger price. 

We’ve written before about how appraisal-style valuation methodology–with direct reference to Delaware appraisal cases–is sometimes used in non-appraisal cases. In December 2017, Vice Chancellor Glasscock, of the Delaware Chancery court, handed down Wright v. Phillips, No. CV 11536-VCG, 2017 WL 6539383, at *1 (Del. Ch. Dec. 21, 2017), a case involving the valuation of business entities not in an appraisal context but rather as the result of a business (and marital) divorce.

Wright concerned a recycling and shredding business composed of three business entities originally 50 percent owned by each of a husband and wife duo. With the parties divorcing in 2013, the business continued until 2015, when the parties reached an impasse and a corporate deadlock ensued. After some litigation, the parties agreed that one would buy out the other; but perhaps unable or unwilling to trust each other’s valuations, the chancery was required to set the value.

Vice Chancellor Glasscock first observed that the business was a going concern, and thus a fair value analysis–the kind invoked by Section 262 of Delaware’s appraisal law–was required. The experts in the case used an “income approach analysis,” which the court accepted and discussed. The Vice Chancellor relied on one of the expert reports as an initial number, and then applied (1) an addition for the tax value of one of the entities tax status as an S corporation rather than as a C corporation; (2) applied a 10 percent marketability discount; and (3) required removal from the valuation any calculation of additional income attributable to discharging the non-continuing partner (what the court referred to as “synergies”).

Tax implications, discounts for lack of marketability, and valuations not including synergies are all issues found in appraisal; little wonder then that the Vice Chancellor cited an appraisal case, SWS, as part of his analysis in this non-appraisal matter. The corpus of appraisal law is likely to continue to provide guidance to Delaware courts–and non-Delaware courts–on valuation issues.

We’ve written before about the SWS appraisal case, decided in mid  2017. After the ruling, petitioners appealed to the Delaware Supreme Court. On Wednesday, February 21, the Delaware Supreme Court held oral argument (which you can watch on this site). Part of the argument focused on the concept of size premium – a primer on which is available here – and which is being contested in the SWS appeal.  For more on the SWS oral argument, see Law360 [$$$].

The Harvard Business Law Review (whose articles we’ve covered before) has published a piece concerning Delaware allowing blockchain to be used for company stock ledgers. While we have written about blockchain repeatedly, the new HBLR article examines how blockchain-based securities could fundamentally change corporate governance. Using Dell and Dole as examples, the author discusses how blockchain can solve delayed settlement and unrecorded transfers issues – issues that can be critical when it comes to determining the entitlement to appraise.

The author notes that blockchain implementation may create value for the economy as a whole but would not necessarily distribute the gains evenly. This issue–effectively a tragedy of the commons–could be resolved through government action. But markets may also play a role. As readers of this blog know, the majority of large U.S. companies are incorporated in Delaware, a state with less than 1 percent of the U.S. population. Part of the reason for that is a market for legal rules–Delaware law, and the Delaware courts, are a more hospitable environment for incorporation than other places. Likewise with blockchain. If early adopters find distributed ledgers result in lower transaction costs – and thus additional investors, more liquidity, easier (and cheaper governance) or similar – this may encourage regulatory reform in states looking to compete with Delaware.  Regulatory reform may, in turn, beget further adopters.

We expect continuing developments with blockchain, and its use with securities, in the future.


Cooley LLP provided a recap of 2017 M&A, along with an outlook for 2018 for Lexology, which includes a discussion of appraisal conditions in private M&A deals. We have blogged previously about the possibility of acquirers including appraisal conditions in public deals.

This 2018 M&A Outlook is a good reminder of the role that appraisal plays in mergers of non-public companies. As Cooley observes: “While the inclusion of any appraisal rights condition remains uncommon in public deals, we commonly negotiate these conditions in private sales of venture-backed companies. Commonly accepted conditions take one of two forms: the absence of available appraisal rights altogether or appraisal rights not having been exercised by a certain percentage of shares.” The piece further suggests the legality of any such advance waivers of appraisal rights “has not been resolved by the courts.”