In appraisal, across the majority of states–and those countries we have reviewed–the main question is the “fair value” of a petitioner’s shares. Some courts and commentators have mixed “fair value” with a similar but economically distinct term: “fair market value.” But even if everyone agrees on what fair value means, that does not mean the law is uniform as to when fair value is being calculated. Consider: Delaware law tasks the court with determining the fair value of the shares as of the merger date. At the other end of the spectrum, California law requires a court to determine the fair value of shares immediately prior to the announcement of the merger. Two states’ laws thus deal with certain eventualities in very different ways. What if the deal takes a long time to close? For California, this makes no difference; the “interim events” between announcement and closing do not come into the analysis. But for Delaware, interim events can have great significance–just because management has struck a deal (including a price) months, sometimes many months, before closing does not mean that that price reflects the value of the company at closing. As an example, imagine an early-stage biotech company or a speculative gold miner. Deal price may be set and a shareholder vote taken; then the company receives FDA approval or a claim pans out, and at closing, the buyer receives the benefit of the increased value while shareholders do not. In larger deals, where numerous regulatory hurdles need to be cleared, the difference in the date of the fair value measure can mean the difference in measuring during a positive or a negative business cycle. So in any appraisal action, the “when” of fair value matters.
While appraisal is typically a creature of statute, appraisal rights can also be a creature of contract–in particular, when an operating agreement, charter, or similar foundational document provides for them (including when a certificate of designation provides for the value of preferred stock). Many states, including New York, allow the members of an LLC–as an example–to include appraisal rights in the operating agreement. While we often cover appraisal on this blog as a statutory remedy focused on shareholder protection, negotiated appraisal rights can be a part of a corporate lawyer’s suggestion box in trying to get a deal done. A minority investor concerned about his or her minority status may be comforted by an appraisal rights mechanism in the foundational documents. Similarly, an investor who is contemplating a minority investment may wish to negotiate for an appraisal provision precisely because it can give an “out”–and, at minimum, bargaining power–if the minority investor sees issues with an otherwise-aboveboard merger. Because appraisal rights are different than breach of fiduciary duty claims and are a post-closing remedy, the minority investor can also point out that appraisal may be a viable remedy in lieu of filing a lawsuit seeking injunctive relief and attempting to block corporate action. This trade–giving up some rights before the closing in exchange for a post-closing remedy–allows the minority and majority investors to protect themselves while potentially creating value for both in the transaction.
Yes. At least according to this extensive comparative analysis of U.S., French, and Romanian law in the University of Pennsylvania Journal of Business of Law (France has appraisal too, but that’s for another post). While obviously a small market and not known for its presence on the global capital markets stage, Romania has an apparently robust appraisal regime, allowing dissenting shareholders to dissent from a variety of corporate actions, demand repurchase of shares, and have an independent expert assess those shares. The independent expert portion is particularly different from U.S. (including Delaware) litigation, which often sees dueling experts, each with its own valuation models and assumptions. But independent, or at least court-appointed, experts at times do make an appearance in appraisal jurisprudence. Delaware chancellors have considered appointing independent experts to assist them in appraisal, and courts in other states have done so, as well.
Loeb Smith, a law firm with a Cayman office, provides this update on dissenters’ rights in the Cayman Islands, focusing on recent developments in interim payments. In reviewing the landscape of investor strategies regarding Cayman mergers, Loeb Smith also notes–as we have written about previously–“Information can also be disclosed during court proceedings for a judicial determination of the ‘fair value’ that could later lead to a securities class action in a US court or other jurisdiction where the target company was listed.” Indeed, this is true in not just Cayman appraisal but also in any appraisal action. Although recently dismissed on statute-of-limitations grounds, a securities action against Towers Watson had previously been proceeding based in part on information gained in the Delaware appraisal.
Cornerstone Research has published a review of 2017 M&A related litigation – and one of the findings is that new appraisal filings in 2017 fell from 2016 highs back to the number generated in 2015.
What do companies need to include in appraisal notices? According to a recent analysis piece in Law360 [$$$], more than they currently disclose. Analyzing a July 2018 opinion by Chancellor Bouchard – Cirillo Family Trust v. Moezinia, No. 10116-CB – the authors of this piece discuss that “merely providing notice of a merger and the existence of appraisal rights is not sufficient” in an appraisal notice. The notice must provide information allowing stockholders to make an informed decision on whether to “accept the merger consideration or to seek appraisal.” The authors, citing Cirillo, suggest that at minimum notices should include “information regarding (1) the background and terms of the merger, (2) the value of the constituent corporations, (3) the board’s decision-making process, and (4) potential conflicts of interest.”
This list of factors appears consistent with the current case law. As appraisal jurisprudence has made clear, conflicts and board deliberations go to the “process” portion of what some commentators have viewed as a sliding scale of deference to merger price. But if a stockholder is forced to make a decision on appraisal without full and fair information on process, it may be impossible – or at least incredibly difficult – for the stockholder to decide whether fair value is being achieved.
The notice in Cirillo was found to be “clearly” legally deficient. “The notice did not include any of DAVA’s financial information, any description of DAVA’s business or its future prospects, or any information about how the merger price was determined or whether the price was fair to stockholders.” But even with such a deficient notice – what remedy is there for a deficient appraisal notice? That’s somewhat unclear. Cirillo was a breach of fiduciary case, and the Court dismissed the breach of fiduciary claim with leave to replead. But other cases we have seen suggest that a quasi-appraisal remedy (again, attached to a breach of fiduciary claim) may be part of the answer. An inadequate appraisal notice may excuse a stockholder’s untimely attempt to assert appraisal via the quasi-appraisal remedy, or provide ammunition for the argument that the quasi-appraisal remedy is most appropriate because only via discovery can the stockholder get the information they were entitled to in the original (deficient) appraisal notice.
As we continue to see more litigation involving the notice process, the authors’ suggestion that issuing good, legally compliant appraisal notices is of increasing importance seems consistent with Delaware jurisprudence.
For a free version of this article (published subsequently), see the Harvard Law Forum on Corporate Governance.
Vice Chancellor Glasscock issued yesterday this AOL ruling on reconsideration, lowering his prior $48.70 determination to $47.08 — going farther below the $50 merger price — on the basis that he had overvalued one of AOL’s pending transactions in his DCF analysis.
The court prefaced its ruling by expressing its displeasure at both parties having moved for reargument, which the court found “rarely efficient or productive” and “encourages run-on litigation.” Underscoring that point, the court found that “[u]nlike revenge, justice is a dish that is best served warm.”
The court otherwise declined to revisit its prior determination on the other pending transaction and declined to decrease to 3.25% its prior use of a 3.5% perpetuity growth rate: “I may have gotten it wrong, but that is a matter for appeal, not reargument.”
The Delaware Court of Chancery just issued two new appraisal rulings:
- Solera (C. Bouchard): the Court awarded merger price less synergies, which comes out to 3.4% below deal price; we have previously reported on the Solera case here; and
- Norcraft (V.C. Slights): the Court awarded a premium of 2.5% above deal price, relying on a DCF analysis and expressly rejecting a valuation based on merger price less synergies.
Both opinions adhered to the Supreme Court’s Dell and DFC rulings, although Norcraft held that despite those decisions, a merger price ruling was not warranted on the facts of that case. Also, both cases rejected unaffected stock price as a measure of fair value based on their respective records. The Solera opinion can be found here, and the Norcraft opinion can be found here.
**This firm is one of the counsel of record for petitioners in Solera.
Does appraisal arbitrage create costly uncertainty for a putative corporate buyer? In The Cost of Appraisal Rights: How to Restore Certainty in Delaware Mergers, 52 Ga. L. Rev. 651 (Winter 2018), the author argues that the well-established ability to alienate voting interest from equity interest with common stock opened the door to appraisal arbitrage – and that either a legislative, or a market plumbing solution, could ameliorate corporate buyers risks when entering into a merger. We’ve covered before how deal lawyers and others must factor in the possibility of appraisal when looking at a transaction (perhaps even more so when a transaction involves insiders, has a poor process, or otherwise does not comply with shareholder-protective standards) – here, the author proposes solutions.
First, a legislative change to the appraisal holding requirement is proposed: require appraisal seeking shares to be continuously held from the record date. Second, structurally, move the securities recording system from one of fungible bulk to actual share tracing through a system of centralized recording. (Note: We’ve written before about how blockchain solutions, which can be centralized or decentralized, could affect appraisal).
To briefly recap and oversimplify what these changes seek to ‘solve’: The vast majority of stock in the United States is held in “fungible bulk” by the Deposit Trust Clearing Corporation (DTCC). Fungible bulk means that one share cannot be differentiated from another share. If a company issued 1,000 shares of stock – any given one of those thousands shares is ‘fungible’ with any other given share – and they are held by DTCC in ‘bulk’ – meaning not assigned to a specific (even individual) beneficial owner, but rather in bulk lots assigned to certain nominees, brokers, etc.
Setting aside the wisdom (or lack thereof) of this system, the result is that it is a metaphysical impossibility, generally, to show that any particular share of stock voted for or against a merger (or abstained). The result is that a share purchased after the record date may well be one of the (again, this is metaphysical – the shares cannot be differentiated) shares that voted against the merger (or abstained), and thus, it carries appraisal rights. This becomes an issue only if more shares seek appraisal than could have possibly voted against the merger or abstained.
The author’s changes here would certainly restrict appraisal arbitrage; as we’ve discussed before, structural solutions that allow for actual share tracing could make for all kinds of changes to corporate governance and shareholder rights (including appraisal). Delaware courts — as well as the legislature — have rejected efforts to import a share-tracing requirement in Delaware appraisal.
The press release by Arca Capital, which previously announced it is pursuing appraisal with respect to AmTrust Financial, highlights a basic question in appraisal: How public are the proceedings?
As an initial matter, you do not need to be as public as Arca. The appraisal process starts with a series of letters to ‘perfect’ your appraisal rights – and that occurs between you, your lawyers, and the relevant brokers and nominees. Then, you need to demand appraisal – a step that involves contacting the company. From there, paths can diverge. One may file an appraisal petition; but if you do not, the Company must file one by statute (keep in mind, appraisal is not technically adversarial – its why many of the case names are “In re: the appraisal of” and not X v Y). And at times, you can ‘tag along’ on appraisal because someone else filed a petition, but you properly sought appraisal.
At some point your name will become public – appraisal proceedings, like the vast majority of American court proceedings, occur in the public domain.
But even then, not every part of an appraisal proceeding will be public. Companies, and investors, have an interest in preserving the confidentiality of their documents and analyses, and Courts often allow confidentiality stipulations and orders, as well as a variety of mechanisms to keep private information private.