2017 was an active year in appraisal, with a number of anticipated decisions – including the recent Dell, DFC Global, and PetSmart opinions. 2018 looks to be filled with further developments. A trio of Law360 articles have highlighted the robust appraisal activity of 2017 – and suggested some cases to watch in 2018. Contributors from Morris Nichols noted the increased activity in appraisal in 2017 in a piece titled “Delaware Litigation 2017: Assessing Trends At Year-End” [$$]. Writers at Law360 also highlighted the Solera appraisal case as one to watch [$$]. Summing up 2017 in review, and perhaps predicting a still-evolving landscape, the authors of “3 Things For M&A Attys To Know About Delaware Law In 2018” [$$] pointed out that “The main takeaway from the numerous appraisal decisions seems to be that there is still no definitive guide to knowing exactly how the Delaware courts will determine fair value for a given deal, as it all depends on the specific circumstances.” As courts wrestle with the specific circumstances of each case, we expect a busy 2018 in appraisal.
On Dec. 14, 2017, the Delaware Supreme Court handed down the Dell decision. We covered the decision previously.
In the month that has followed, coverage of the Dell decision has been intense. Numerous news outlets, blogs, corporate governance authors, and law firms have provided their own take on the Dell decision. We have collected some of that commentary, with illustrative quotations reflecting the breadth of that coverage, as follows.
Appraisal is the New Fiduciary Duty, Business Law Prof Blog. “The substitution of appraisal litigation for fiduciary litigation is near complete: improving upon deal price in the context of appraisal may be impossible unless something went wrong in the sales process (at least for the sale of a public company without a controlling stockholder).”
Appraisal Apprisal: Dell v. Magnetar, Eric Talley & Jeffrey Gordon, CLS Blue Sky Blog. “After Dell, one can safely assume that courts will focus even more intently on whether the merger price emerged from a robust and value-maximizing deal process.”
Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies; Lawrence Hamermesh and Michael L. Wachter, HLS Forum on Corporate Governance and Financial Regulation. “Facilitated largely by ‘appraisal arbitrage’ — the practice of purchasing shares of stock after announcement of a merger, with a view to exercising the statutory right to an award of ‘fair value’ in lieu of the merger price — the once-discredited appraisal remedy has become a significant phenomenon in shareholder litigation.”
Guest Post: From Corwin to Dell: Implications for Investors and Corporate Acquirers, the D&O Diary. “In sum, the arc of Delaware law from Corwin to Dell may result in under-enforcement of fiduciary duties through representative litigation, and may unintentionally entice increasingly aggressive breaches of fiduciary duties.”
In re Appraisal of Dell Inc.: The Continuing Relevance of Deal Price in Delaware Appraisal Proceedings, Business Law Today. “Dell does, however, indicate that MBO transactions will be subject to more rigorous scrutiny in the context of appraisal proceedings and, given certain inherent realities, may be less likely to be found to have produced a price equal to fair value. Even so, Dell does not foreclose a finding that the deal price in an MBO transaction equals fair value.”
Implications of the Recent Dell Appraisal Decision, Paul Weiss. “To reduce the risk of a large appraisal award, target boards may wish to make a record of their focus on the company’s intrinsic value, as opposed to the premium to market represented by the transaction price.”
Delaware Supreme Court Reverses And Remands Dell MBO Appraisal Decision, Finding The Trial Court Erroneously Disregarded The Deal Price, Shearman & Sterling. “The Court thus reversed and remanded with instructions to give such weight to the deal price, and explain the weight given to each factor considered, or — at the Court of Chancery’s discretion — to enter judgment at the deal price without further proceedings.”
Dell Ruling Bridges Philosophical Gap In Del. Appraisal Law, Law360 [$$]. “You can’t look at the Dell opinion and say the court was going to take just any old deal,” Hamermesh said. “It was a — show me your process is reasonable. There may be almost a presumption, but it’s rebuttable.”
Appraisal Litigation Update, Cadwalader, HLS Forum on Corporate Governance and Financial Regulation. “A Well-Executed Sales Process is Instrumental in Determining the Weight to be Ascribed to Deal Price in an Appraisal Analysis.”
Delaware Supreme Court Reaffirms Importance of Deal Price in Dell Appraisal Reversal, White & Case. “To prevent creating a bright-line rule, the Supreme Court was careful to note that it was not holding that ‘the market is always the best indicator of value, or that it should always be granted some weight.’ Rather, the Supreme Court noted that the record contained compelling evidence reflecting ‘market efficiency, fair play, low barriers to entry, outreach to all logical buyers, and the chance for any topping bidder to have the support of Mr. Dell’s own votes … .’”
Delaware Supreme Court Further Clarifies Appraisal Principles Applicable to Public Company Buy-Outs, Clifford Chance. “[Dell], and the Court’s earlier DFC decision, have reshaped the law governing exercises of statutory appraisal rights in public company buy-outs.”
In Kahn v. Stern, an opinion issued by the Delaware Court of Chancery mid last year, the Court dismissed a breach of fiduciary duty claim seeking, among other remedies, quasi-appraisal damages. The case arose out of the sale of Kreisler Manufacturing Corporation (“Kreisler”), a small, thinly-traded (listed only on the pink sheets), public aerospace manufacturing company, to Arlington Capital Partners (“Arlington”). The merger was approved by written consent of a majority of Kreisler’s outstanding shares, without a stockholder vote, and was announced on May 31, 2016. That same day, Kreisler distributed an information statement to its shareholders to inform them of the deal and allow them to decide whether to exercise their appraisal rights—the deadline for seeking appraisal was June 20, 2016. Notably, the merger agreement contained an “appraisal out” provision that permitted Arlington to back out of the merger if more than 10% of Kreisler’s outstanding shares sought appraisal (see our prior posts discussing such provisions here, here, and here). The plaintiff, however, did not seek to enjoin the merger pre-close or exercise his appraisal rights by the appraisal cutoff. Instead, the plaintiff filed a complaint for breach of fiduciary duty against the Kreisler board days after the appraisal deadline had passed.
The complaint, among other things, alleged that the Kreisler board breached its fiduciary duties by: (1) approving the transaction in light of certain “side deals” that were negotiated by two inside directors in connection with the merger, and (2) making misstatements and omissions in the information statement provided to Kreisler’s shareholders. With regard to the disclosure claims, the plaintiff alleged that the defendants knowingly withheld or misrepresented material information in the information statement to reduce the likelihood that Kreisler’s shareholders would prevent the merger by asserting appraisal rights, and in so doing, the defendants deprived Kreisler’s shareholders of their ability to make a fully informed decision regarding their appraisal rights. In light of the injury caused by these alleged disclosure deficiencies, the plaintiff sought quasi-appraisal damages.
In deciding the disclosure claims, the Court noted that if the plaintiff had sought injunctive relief before the merger closed, such relief may have been warranted. The Court explained that, in the pre-close, injunctive relief context, the Court would have applied enhanced scrutiny and looked to whether the information statement withheld or misstated information material to the stockholders’ decision to approve the deal or seek appraisal. In the post-closing, damages context, on the other hand, the Court explained that the plaintiff must have alleged facts making it reasonably conceivable that the director defendants, who were found to be independent and disinterested and were protected by an exculpatory charter provision, acted in bad faith in issuing the disclosures. The Court found that nothing in the record, even in light of the side deals and appraisal-out provision, created an inference that the alleged disclosure deficiencies were made in bad faith. Thus, the Court dismissed the disclosure claims, which included the plaintiff’s request for quasi-appraisal damages.
For additional insight on the Court’s views on the quasi-appraisal remedy, see our prior post here.
The Harvard Business Law Review has published “The High Cost of Fewer Appraisal Claims in 2017: Premia Down, Agency Costs Up” an article we’ve blogged about previously, including commentary from interested authors. The HBLR piece, by Matthew Schoenfeld, argues that weakened shareholder litigation reduces the acquisition premium in mergers. This is another contribution to the growing body of work connecting appraisal – and other litigation remedies – to protection of shareholder rights and value.
A copy of the HBLR article is available here.
Yes, according to this posting. Delaware law requires that a shareholder seeking appraisal must not have “voted in favor of the merger” (which is impossible for nonvoting common stock) nor “consented thereto in writing pursuant to Section 228.” The mere fact that stock is issued as non-voting, as some recent IPOs have done, does not strip it of appraisal rights.
Seven years ago this week, in Roam-Tel Partners v. AT&T Mobility, C.A. 5745-VCS (Del. Ch. Dec. 17, 2010), then-Vice Chancellor Strine held that in a short-form merger, a stockholder can revoke its prior waiver of its appraisal rights within the twenty-day statutory election period, absent any prejudice to the corporation. In that case, the stockholder submitted to the company a letter of transmittal along with his stock certificates, but then changed his mind, returning their (uncashed) check and timely demanding appraisal. The court compared his initial decision in accepting the merger consideration to that of submitting a proxy in a long-form merger, which is freely revocable at any time prior to the shareholder vote.
In such transactions, shareholders are thus permitted to reverse their tender and opt instead to appraise so long as they do not actually accept the merger consideration and submit a timely appraisal demand within the statutory period.
The Delaware Supreme Court issued its highly-anticipated ruling today in the Dell appraisal case, reversing and remanding the trial court’s 28% premium awarded to the stockholders. In sum, the court held that where a company is sold in a pristine M&A auction process, the chancery court must give the merger price “heavy weight” in its ruling, leaving it to the trial court to decide just how much weight that should be in this case. The Supreme Court also ruled on a cross-appeal challenging how the trial court assessed expenses across the appraisal class.
For further coverage of the Dell decision, see the links below.
**This firm is a counsel of record in the Dell case.
Eight years ago today, in DiRienzo v. Steel Partners Holdings L.P., No. 4506-CC (Del. Ch. Dec. 8, 2009), Chancellor Chandler reaffirmed the principle that the record holder requirements of Section 262(a) demand strict compliance.
The Chancery Court dismissed an appraisal petition on grounds that the appraisal demand was not made by a record holder listed on the company’s stock ledger. The record holder, according to the court, was neither the party seeking appraisal nor his broker, but rather the central security depository, Cede & Company. The court rejected petitioners’ argument that the company waived its right to object to the defective appraisal demand by submitting three letters to petitioners prior to the filing of the appraisal petition. The court similarly rejected petitioners’ estoppel argument premised on the company’s alleged disclosure violations in the appraisal notice.
For beneficial owners, the takeaway from this case remains true today: to be entitled to appraisal their record holders must submit an appraisal demand on their behalf.
Today’s Law360 [[$$]] reported on the oral argument conducted yesterday before Chancellor Bouchard in the Solera appraisal case.
** This firm is among the counsel of record in Solera.
On Monday, Law360 [$$] reported that the stockholders in the Clearwire appraisal action filed their opening brief in support of their appeal of the Chancery Court’s ruling, which found the fair value of Clearwire Corp. to be $2.13 per share, well below the $5 per share deal price paid by Sprint Nextel Corp. As reported in the article, on appeal, the stockholders argue that the “staggering discount” awarded by the Chancery Court is “virtually unprecedented.” We have previously posted on the Chancery decision here. We will continue to monitor the appeal and post on new developments as they arise.