In its recent blog post, VentureCaseLaw covers a 2015 Delaware decision and how Delaware law deals with appraisal in instances where a Company has drag-along rights. In summary:

Venture-backed companies should not assume an implied waiver of minority appraisal rights in a merger that utilizes a voting agreement’s drag-along rights if procedural requirements are not followed. When a waiver of appraisal rights has procedural requirements, they need to be followed or eliminated via an amendment. Alternatively, the drag-along can require minority stockholders to explicitly approve the sale, instead of having the sale be de facto valid without their signatures given the drag-along.

CLS BlueSky Blog has published a post discussing the current state of Delaware appraisal law and fitting appraisal developments into the broader context of M&A rules and corporate governance.  The post covers recent appraisal decisions, with the authors concluding that: “in our view, generally, the court is more likely to continue to reach above-the-deal-price results in non-arm’s-length merger cases (such as controller transactions, squeeze-outs, and certain MBOs-unless the transaction complies with the MFW prerequisites), and may also do so in arm’s-length merger cases involving a seriously flawed sale process.”  This view fits with the trend of academics and attorneys focusing on both the sales process and then the valuation as part of appraisal.  The authors also cover the 2018 proposed amendments, which we discussed here.

Professor Robert Reder and Vanderbilt JD candidate Blake Woodward have published a piece in the Vanderbilt Law Review En Banc reviewing the Delaware Supreme Court’s DFC decision and the intricacies of Chancellor Strine’s 85 page opinion. We’ve posted extensively about DFC throughout its history.  The authors of the current piece point out that DFC can be partially read as a requirement for clearer explanations by the trial court of their reasoning with respect to valuation.  The authors summarize DFC’s import when it comes to encouraging explanation by lower courts as: “when the Chancery Court is faced with a choice between the deal price and a discounted cash flow analysis as the basis for a fair value determination, a sliding metric balancing the quality of the sales process with the reliability of the projections utilized in the discounted cash flow analysis ought to be employed.”

This sliding mechanism – involving a review of the sales process that then feeds into how much weight the court gives the deal price – fits well with recent research that shows appraisal is “more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism” – i.e., the kind of cases where the ‘slide’ is against a reasonably fair process.

Authors from Potter Anderson write in the spring 2018 edition of Delaware Laws Governing Business Entities [$$] that recent developments in appraisal have restored ‘balance’ to the remedy.  Citing case law where courts have deferred to deal price, amendments to the appraisal statute, and the statutory authorization of distributed ledger (i.e., blockchain) technology for corporations, the authors posit that some kind of ‘balance’ is being restored to what they propose was an otherwise unbalanced remedy.

History may not be so linear.  Appraisal, as the authors acknowledge, has over a century of history in Delaware alone.  The appraisal remedy was, for a long time, relatively unused.  It has become far more utilized in recent years, and new developments, including technological change, may well alter the appraisal space in new and unforeseen ways going forward.

Last month, we saw authors calling appraisal a maze, and now, an analogy to a sculpture.  In the journal M&A Law [$$], April 2018 edition, authors from Wilson Sonsini write about how recent Delaware cases have shaped and sculpted the appraisal remedy, but left open a number of issues for future decisions.  Citing Aruba, AOL, DFC, and Dell, the authors conclude that deal synergies and market efficiency will take on increased importance and prominence in appraisal jurisprudence.

Whether appraisal is best described as a maze or sculpture, recent decisions have shown that the facts of each individual merger matter and that no one-size-fits-all rule applies.

CLS BlueSkyBlog recently posted regarding the interaction of the Delaware business judgment rule and appraisal.  Focusing on the Delaware Supreme Court’s commentary in Dell, the author of the post highlights that unlike Dell – which was a management buyout – hostile takeovers may implicate the intersection of appraisal and the business judgment rule in unique ways.  The author proposes that with a hostile takeover management may well be committed to a higher value as a way of encouraging resistance to the bidder.

The post focuses attention on the important intersection of the business judgment rule and appraisal rights; shareholder and management incentives are not always aligned, and not every merger situation is identical.  Appraisal rights are so critical because shareholders (especially minority shareholders) retain a fundamental right to avoid having their fortunes be tied to managements’ incentives.

On April 23, 2018, the Delaware Supreme Court affirmed last July’s Chancery court ruling in the Clearwire case.  This decision ends the appeal by Clearwire shareholders looking to overturn the lower court decision finding that Clearwire was worth $2.13 per share, below the $5 merger price. When the Supreme Court, or any appellate court, affirms without discussion or opinion, it provides little guidance for litigants going forward. Here, Clearwire had unique facts – covered in our original post – that set it apart from many other appraisal cases.

 

The Harvard Law School Forum just put out this piece on appraisal, wherein attorneys from Debevoise & Plimpton discuss the current state of Delaware appraisal jurisprudence and seek to place the key recent decisions in the context of the overall arc of appraisal law.  The attorneys close with this observation:

So where does this leave us? First, we are meant to put significant trust in efficient market theory, relying as a starting point on both market price and, if resulting from a strong process, deal price. Second, we need some additional guidance on what will or will not jeopardize initial reliance on deal price. And third, we still need a fair amount of guidance on what, if anything, to subtract from deal price in a sponsor deal, on what to subtract from deal price in a strategic deal, and on what, if anything, to add to market price in either type of deal.

In contrast to the United States, where an enabling legal regime and a fortunate confluence of a variety of factors have led to a surge of appraisal petitions and appraisal arbitrage, the appraisal remedy remains a sparingly utilized weapon in the arsenal of shareholders in the EU. Minority shareholders in the EU are reticent to exercise appraisal rights. One could plausibly argue that appraisal rights serve as a remedy of desperation for shareholders in the EU. The appraisal remedy is viewed as a last resort measure by shareholders. Furthermore, in cases where shareholders exercise their appraisal rights, their interventions tend to be incidental and ex post. Despite the fact that some U.S. hedge funds that are willing to use appraisal rights as part of their overall strategy are increasing their activities in the EU, a variety of factors, including a hostile legal regime, hinder the growth of appraisal and appraisal arbitrage in the EU.

In particular, the lack of harmonization of appraisal rights across EU Member States severely hampers their exercise. The European legislature has not yet introduced a U.S.-style general appraisal right with respect to fundamental corporate changes. Article 4(2) of the Cross-Borders Directive, which regulates cross-border mergers in the EU, allows but does not require Member States to adopt provisions designed to ensure protection for minority shareholders who have opposed the merger. The Directive is rather vague as to who qualifies as a minority shareholder, which company’s (surviving or disappearing entity) minority shareholders will receive protection, and the form of the protection. As a result, Member States’ rules regarding appraisal rights exhibit significant differences with respect to the events triggering appraisal rights, the form of appraisal rights, and the procedural requirements for exercising appraisal rights. Nevertheless, there is growing momentum for the introduction of harmonized appraisal rights in the context of cross-border mergers. The 2013 Study on the Application of the Cross-Border Mergers Directive identified the lack of harmonization regarding minority shareholder protection as an obstacle to cross-border merger activity. Following the 2012 EU Commission Action Plan on European Company Law and Corporate Governance, which announced that the Commission would consider amendments to improve the Cross-Border Mergers Directive, the Commission launched in 2014 a Consultation on Cross-Border Mergers and Divisions. The majority of respondents were in favor of harmonization of minority shareholder rights in connection with cross-border mergers. Their preferred method of harmonization was full harmonization. Most notably, proponents of harmonization considered the right to request compensation, namely appraisal rights, as the appropriate remedy.

Overall, investors have strongly voiced their concerns regarding the lack of harmonization in the context of cross-border mergers, arguing that multiple divergent legal regimes are an obstacle to cross-border deal activity. The divergence of legal rules imposes significant costs, introduces uncertainty, and can hinder the free movement of capital, one of the key elements in the EU single market. For a fuller discussion of EU appraisal, see Prof. Seretakis’s paper here.

** Lowenstein Sandler LLP thanks Professor Seretakis of Trinity University College Dublin for his contribution to this blog.  Professor Seretakis focuses on issues of law and finance in the EU.  His profile can be found here.  Lowenstein Sandler LLP does not practice law in the European Union.