It’s been eight years since the Delaware legislature amended the appraisal statute to allow appraisal respondents the discretion to prepay some or all of the merger consideration, and at a time of their choosing.
We have previously blogged to mark the anniversary of this statutory amendment, one year after the amendment and two years afterward; seems like a good idea to refresh on this lively issue today.
The amount and the timing of any prepayment is entirely within the discretion of the appraisal respondent; the stockholder has no say-so or other input into this piece. The appraisal target is faced with a game-theory proposition of wanting to pay enough to stop the interest clock on outstanding merger consideration, on the one hand, while leaving ample room to argue that the appraised fair value should fall somewhere comfortably below merger price, on the other hand. After all, it is well settled Delaware law that prepayment amounts are not subject to clawback or disgorgement, so any amounts prepaid cannot be recovered by the appraisal target. Hence the decision-making around how best to size the prepayment amount to meet the competing interests of (i) halting the interest accrual without (ii) setting too high a floor on the appraisal fair-value determination.
By our anecdotal experience, prepayment amounts tend to be in the range of approximately 75 to 80% of merger consideration, with those levels increasing in a high-interest rate environment. (This is contra to some early academic commentary, which suggested prepayment would be rare.) Of course, the exact prepayment amount will obviously vary in any particular case, based on such factors as the respondent’s financing costs, integration success and litigation-risk management concerns, among others.