The vast majority of publicly announced mergers are approved by shareholders, certainly more than 90% no matter how you reasonably slice the data.  One way to view this data is that shareholder votes are perfunctory rubber stamps; but another is to view the merger process as self-selecting – a publicly announced merger is one that acquirer and target believe will receive shareholder approval.  In the latter case, the threat of failure is the motivating factor that effects the offer price pre-announcement; it is not the vote itself.  And we see this in practice as well.  It is the incredibly rare instance where an acquirer makes in seriatim bids, watching each fail in turn trying to find the price that gets the acquirer the necessary votes: we just don’t see this, period.

And if the vote itself is not what generates value to shareholders, then what of the costs of the vote itself?  Voting takes time – sometimes a long time.  This fact particularly intersects with appraisal since when is an important question when determining value.

Professor Matteo Gatti takes on the question of reducing the cost of merger voting in his 2018 article “Reconsidering the Merger Process: Approval Patterns, Timeline, and Shareholders’ Role.” [pdf via Hastings Law Journal].  The Professor proposes three potential reforms: (1) on-demand voting (meaning a threshold number of shares, perhaps 10%, must request a vote for a full vote to be needed); (2) randomized approval (meaning only a certain percentage of proposed mergers would be subject to a vote, but without knowing if their merger would be selected, the management teams would still be under threat and thus exercise their obligations to maximize value; while the non-selected mergers would get a more efficient approval); and (3) shorter approval timelines (shorten the SEC review process; shorten the 20 days Delaware requires for investor consideration of a preliminary proxy; etc.).

How would these changes affect appraisal?  While Professor Gatti seeks to preserve appraisal rights in any of the proposals, changes would obviously be required to maintain the appraisal remedy; and more importantly, to retain a robust appraisal remedy that continues to provide enhanced premia to shareholders in mergers.  Notably, in any proposal eliminating instances where every shareholder is given a voting opportunity (such as proposal 2, randomized approval), it may be incumbent on the legislature or courts to formalize the view that while voting “yes” on a merger is a bar to appraisal rights, any other action, including silence in the case that voting rights are not actually provided, abstention, or voting no, preserves appraisal rights.  No doubt these are interesting proposals to change the merger process, and the appraisal remedy could surely be adapted to any of them.

One other idea for making voting more efficient?  Blockchain – something we’ve covered multiple times before.

No. At least according to Vice Chancellor Slights III in the case In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018).  While it is true that in many circumstances appraisal is the exclusive remedy… not always!

Xura highlights that the facts of each case matter and that an investor needs to think about the full suite of their potential claims and options in any merger dispute.

For more on Xura, see this coverage.

In 2017, Rwanda amended its companies act and introduced appraisal rights for minority shareholders [.pdf].  A recent article in the New Times provides an overview of, and reflects on, the efficacy of Rwandan appraisal.  The parallels between Rwandan appraisal (as described in the links provided) and Delaware appraisal are notable: appraisal is offered to dissenting shareholders who would otherwise be forced to accept certain major corporate actions (such as a merger); the dissenting shareholder must demand appraisal; and the Company must then pay the dissenter “fair value” for their shares; and strict timelines govern the entire process.

Notably different is that in Rwanda (again, according to the sources noted) the determination of fair value occurs by a set of arbitrators. Who appoints the arbitrators, precisely what criteria they shall use, and whether the dissenter then has recourse to the Rwandan courts is not made clear from the Act.  While this is certainly different than what we see in Delaware, requiring arbitration of appraisal rights is not without precedent in the US.  See, for example, this notice of appraisal rights to limited partners that requires arbitration.

What is particularly notable about Rwanda is that the appraisal rights provided are new – now only two years old.  As with other jurisdictions like Delaware, the Cayman Islands, or South Africa, no doubt the progress of cases and practical experience among deal lawyers and others will refine the appraisal practice in that country over time.

Probably not.  But this interesting analysis on the possibility of crypto asset mergers certainly allows for the possibility. We’ve covered blockchain and appraisal before, including the possibility of having shares put onto a blockchain, allowing for easier tracing, counting, voting, and other improvements over the current system of fungible bulk; but this is something different.  If one crypto asset (one blockchain community effectively) ‘merges’ with another, it could be a rule of the crypto asset to provide for appraisal rights – allowing dissenting crypto asset holders an ‘out’ of some kind (whether involving a court, a formula, or some other procedural or mechanistic system).

Thinking about new assets helps put in context that appraisal rights are a simply a procedural rule regarding ownership – while the most common and talked about use of appraisal rights is with respect to stock (and involving mergers), there are numerous other examples of appraisal rights in practice including with private companies, appraisal by contract, and – perhaps in the future – crypto assets.

Earlier in 2018, the Tennessee Supreme Court clarified Tennessee’s appraisal and valuation law in the case Athlon Sports Communications v. Duggan. Tennessee had long followed the “Delaware Block” system of valuation. The Delaware Block system averages market value, asset value, and earnings value to arrive at a valuation. But as one commentator has observed  “In the last 25 years, the traditional Delaware Block framework has become outmoded and less relied on by courts and valuation analysts.” Delaware’s Supreme Court already holds that the Delaware Block method is not the exclusive valuation method in the state (despite the name!). In Athlon, the Tennessee Supreme Court brought Tennessee appraisal law forward in finding that the Delaware Block method was not the sole measure of fair value in Tennessee, opening up the use of other valuation metrics, such as a discounted cash flow model.

For more on this decision, see this recap.

In the 12th Edition of the Mergers and Acquisitions Review, the entry regarding the Caymans Islands includes discussion of the Cayman appraisal regime and confirms what other commentators have observed: Cayman Islands appraisal is in flux as the result of appeals of some of the first major appraisal decisions in that jurisdiction.  Like in Delaware, Cayman courts have to contend with various precedents, some of which are later overturned or modified.  In particular, recent Cayman decisions have dealt with minority discounts, cost-sharing, and other issues relevant to appraisal.

** Lowenstein Sandler does not practice in the Cayman Islands.

Appraisal cases increasingly focus on how markets react to merger news and what one learns from that.  Recent cases that have looked to “unaffected” merger price – that is, the price of a share of the target company before the merger announcement – in part because of the fundamental truth that mergers are market moving events.

So are the breakup of mergers. The case of Fresenius and Akorn, pending before Vice Chancellor Travis Laster, while outside the realm of appraisal, has seen the Vice Chancellor asking questions of the parties very close to the kind of questions one sees in appraisal. As this analysis from Law360 [$$$] discusses, the Vice Chancellor pressed the parties’ lawyers on how the market was valuing Akorn with the uncertainty of the merger. While ‘merger price’ in the deal is $34 a share, Akorn trades for less than $20 a share – and the Vice Chancellor noted that without a deal at all, one would imagine the market price would be even lower.

This line of questioning – and the economic principles underlying it – suggest more than such a limited reading. Akorn’s market price is a reflection of information and risk. Certainly, even if Akorn was an incredibly attractive asset at $33, any buyer would need to consider the mess of the litigation, and the risk that Akorn is force-sold to Fresenius, in their valuation. This analysis highlights the fact that a pending merger bid (no less pending merger litigation) can distort the market price – something that the appraisal remedy aims to address.

For more on the Akorn Fresenius litigation, see the Law360 coverage [$$$].

Fresenius has prevailed at the Chancery court level.

Appraisal rights are creatures of statute, and as a result, for the most part, the conditions for appraisal are laid out by the legislature. Many statutes provide for appraisal rights in instances where there is a “merger” – what one might traditionally understand as an entity purchasing another entity, or purchasing all the stock of another entity. But merger-esque corporate actions can come in numerous flavors and types, and not all of them will carry appraisal rights. In many instances, the merger-esque transaction is not termed a merger at all, a notification of appraisal rights is not generated, and investors may be left in the dark about the fact that a merger-in-fact (but not called a merger) is occurring where they have valuable appraisal rights.

Enter the de facto merger doctrine. The de facto merger doctrine, usually associated with successor liability, looks to the underlying reality of a transaction to determine if it is actually a merger (and thus, would usually carry appraisal rights), or something else (that may not). Professor Bainbridge recently explored this topics with respect to California, highlighting a difference between California (which recognizes the doctrine) and Delaware (whose courts have a very restrictive view of the doctrine, to the point it is not often available).

In the context of appraisal, and in light of the Dr. Pepper decision we covered before, it’s important to note that not every transaction termed ‘not-a-merger’ will be free of appraisal rights. Critically, Dr. Pepper is a Delaware case.  Appraisal rights in other states may well be available for de facto mergers where those states have a more expansive view of the de facto merger doctrine than Delaware does. The name of the transaction does not always control, and doing a careful evaluation of the transaction is critical to determining whether there may be otherwise unexplored remedies for an aggrieved investor.

Not really, and definitely not in the way Delaware does, at least according to this 2013 analysis.

Hong Kong lacks a general appraisal remedy; instead, at least for public companies, the takeover must be evaluated by an independent advisor and those finding made available to shareholders.

Considering Canadian and Cayman Islands appraisal rules, we see great diversity across appraisal regimes worldwide, even among jurisdictions that have a common legal-ancestor (English common law).

**Lowenstein Sandler does not practice in Hong Kong.  Consult a Hong Kong attorney for questions regarding Hong Kong law.