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.

As we previously covered, a recent South African court decision has clarified the scope of appraisal rights in that country with respect to a deal that was other than a classic merger.

Webber Wentzel, a law firm practicing in South Africa, has written this piece on the decision, concluding, “The decision of the High Court will give comfort to minority shareholders seeking to exit group companies where they oppose certain corporate actions at subsidiary-level.” The law firm also states that the defendant/respondents intend to appeal–so we can expect further developments on South African appraisal in the future.

A South African trial court has found that an investor who owned shares of a parent company which sold off its operating subsidiary is entitled to appraisal rights. The case concerns the appraisal rights of an activist investor in the company KWV, which had an operating subsidiary that owned liquor assets. According to a press account, the original merger was structured as a purchase of the KWV operating subsidiary, leaving the holding company with some property, art and cash. The investor demanded appraisal, arguing that the transaction for ~13 South African Rand per share undervalued his shares in the holding company – which he pegged as worth significantly more, and which a press account says the acquirer valued at ~25 South African Rand. As the proceedings progressed, the investor’s entitlement to appraisal was challenged on the basis that the acquirer did not purchase the holding company – just the operating subsidiary. The South African court rejected this argument, finding that the investor has appraisal rights and thus may continue his appraisal claim.

*** Lowenstein Sandler LLP does not practice in South Africa and does not provide advice on South African law. The content of this post is derived from press accounts about the case.

In Delaware, appraisal is a creature of statute. It is a statutory claim, born from 8 Del. Code Section 262; it is a claim in its own right, but it also carries with it statutory requirements. Appraisal requires that the right kind of demand be sent at the right time by the right entity. Quasi-appraisal is a creature of the common law and, as lawyers from Blank Rome observe in a growing concern for deal lawyers. Whereas appraisal rights claims are basically individual in nature, quasi-appraisal has been brought as a potential remedy for a class of all shareholders who have otherwise foregone their appraisal rights.

The differences between appraisal and quasi-appraisal go deeper than just their source in statute or common law. While appraisal is a well-defined “claim” in its own right, quasi-appraisal is far more akin to a remedy than to a claim. While both demand a determination of “fair value,” the vast majority of Delaware case law determines fair value within the confines of the statutory appraisal scheme, including, for example, a bar on considering synergies. Quasi-appraisal is more “amorphous”–as the authors observe–and can frustrate predictability in a merger. Whereas appraisal claims must, by statute, be known (and pressed) at a certain time, quasi-appraisal remedies/claims can pop up later, after the appraisal window has closed.

The authors of this piece also point out that unlike appraisal, the quasi-appraisal remedy is often connected to a breach of fiduciary claim (note that appraisal claims require no breach of any duty and require no proof of any wrongdoing by anyone). Breach of fiduciary duty claims, in turn, are directed at the corporate officers and directors, not the company itself, and those officers and directors, in turn, may have indemnification rights from the company or the insurance that covers claims against them. The takeaway then is that a when a party is seeking quasi-appraisal, it may well involve many more parties and may come up at a time well past the otherwise statutorily set appraisal window. As the authors observe:

[A]s quasi-appraisal claims continue to increase, the predictability that comes with the timely perfection of appraisal rights may be lost. Buyers may need to consider more than just the number of dissenting stockholders and, more specifically, also consider if a class of all (or most) of the stockholders would or could pursue a quasi-appraisal claim against the seller’s former directors for which the buyer might have indemnity responsibility. … [The] intersection of quasi-appraisal remedies and directors’ indemnification rights could put a buyer potentially at odds with a seller’s former directors, and highlight further unanticipated deal risks. Navigating these changing tides in Delaware corporate law is of critical importance, particularly for buyers, and these considerations should receive appropriate attention in the early stages of the deal negotiations.

In the wake of the Dr Pepper decision that a reverse triangular merger does not carry appraisal rights and considering corporate counsel’s growing concern over appraisal petitions, one might wonder whether we will see a rush of reverse triangular mergers in order to try and thwart investor’s appraisal rights. Lawyers from Fried Frank say no in this Law360 piece [$$$]. At its core, the authors focus on the Chancery Court’s own, footnoted view that a rush to reverse triangular mergers is an “overstated” risk, because the structure has been known and employed before. The authors agree that there will not be a move toward this contorted merger structure (with a major caveat, covered below), writing this:

In our view, it is unlikely that the structure would be broadly used solely for the purpose of avoiding appraisal rights. We note that the structure involves the disadvantages of complexity (making it potentially impractical in any competitive bidding situation) and leaving an equity stub in the hands of the target public stockholders (a result that acquirers typically disfavor). Moreover, generally, with an exception possibly in the case of conflicted controller transactions, it would be inadvisable to structure a transaction based primarily on avoiding appraisal rights–given that appraisal claims are made only in a relatively low (and recently declining) percentage of transactions, that appraisal awards significantly above the deal price are made only rarely (recently, even more rarely), and that appraisal awards at (or even below) the deal price have been increasingly prevalent recently.

This is a notable analysis. The authors contend that the structure may be impractical when there are competitive bids (i.e., when appraisal is not particularly favored to begin with) and then draw an exception for conflicted-controller transactions (when appraisal would be favored because of issues with the deal process. Put another way, the reverse triangular merger structure may not be used when appraisal isn’t viewed as much of a threat to begin with. But does Dr Pepper open the door to using this anti-appraisal structure in the exact kind of deal where a significant appraisal uplift is possible, such as conflicted-controller transactions? The authors seem to acknowledge as much.

As appraisal risk continues to be meaningful in conflicted-controller transactions, the Dr Pepper structure might be attractive in these situations if the controller is prepared to leave some of the equity of the target company with the sellers. We note that the public equity stub could be eliminated through a reverse stock split following completion of the merger; however, there would be an issue whether that additional step might (1) convince the court to view the structure as an impermissible contrivance to avoid appraisal (thus leading to a different result than in Dr Pepper) and/or (2) raise fiduciary issues and affect the court’s review of the transaction under the “entire fairness” standard. … There are other, less complex structures that could be considered and that could render appraisal rights inapplicable, although, of course, any novel structure could raise business and practical issues and prompt legal challenges.

Like with the appraisal amendments and differing predictions of how those would affect appraisal filings, the impact of Dr Pepper on choice of deal structure remains to be seen.

A new piece by Skadden focuses on some old, and some new factors regarding prepayment. Since the 2016 appraisal amendments, respondents in an appraisal proceeding have had the right to ‘prepay’ some or all of the merger consideration.  The mechanics of this are basic, but deserve a moment of explanation.  In appraisal proceedings, unlike in many other lawsuits, the petitioner/plaintiff already owns something of value (stock) at the start of the proceeding – the Court’s job is to determine how much money that stock is worth.  At the end of the proceeding, which is potentially years away from the start, the petitioner is due interest on the funds they were denied during the pendency of the lawsuit – i.e., the value of their stock as determined by the Court.  As an example: if a merger occurred for $10 a share (merger price), and a shareholder demanded appraisal for 10 shares, it may be 2 years before the Court determines that the “fair value” of those shares was actually $15 a share.  The shareholder has lost 2 years of use of $150 of value, and thus is due interest on that.  Even if the Court found that the merger price was fair value, the shareholder still has lost 2 years of use of $100 – and interest would attach to the $100.

Now, enter prepayment.  It is doubtful, if not impossible, that any appraisal proceeding would ever reveal a value of 0 for the appraising shares – so a company will always owe some interest on some portion of the consideration. In order to allow a company to reduce its interest risk, while also providing the shareholder use of their value, in 2016 the Delaware legislature allowed companies to prepay some (or all) of the consideration, and thereby cutoff the interest clock on the portion they prepaid.  Multiple companies have taken this route in their appraisal proceedings.

Last year, we covered how prepayment had been progressing after a year, and how the reality compared to suggested prepayment factors and strategies considered in the runup to the 2016 change in law. As we near the two year mark, others have continued to cover the factors for and against prepayment.  Skadden’s new piece points out that the federal reserve (which sets the ‘base’ interest rate on which the appraisal-related interest rate is determined) has been increasing rates over time.  This augurs for prepayment as the interest exposure goes up as the base rate goes up. Skadden also points out that prepayment can ‘break up’ the need for capital to pay off the appraisal consideration  – as opposed to a company having to come up with the entirety of the appraisal consideration at the end of the case, when business conditions, interest rates, or other financial considerations may be different.

Each case will no doubt be different, and no one size fits all strategy of prepayment will apply.