For those interested in appraisal outside the US, the recent text Cross-Border Mergers, now available, containing a chapter on EU appraisal and a discussion of why the EU has not seen a rise in appraisal activity – unlike the US. We thank the author of the chapter, Professor Seretakis, for the excerpt below:

Appraisal rights, a protection mechanism for minority shareholders, have recently captured the attention of academics and policymakers. The rise of a new breed of hedge funds which specialize in so-called appraisal arbitrage has resulted in a spectacular increase in appraisal petitions in connection with M&A transactions in the US and has led to calls for a tighter regulation of the appraisal remedy. Despite the growing popularity of appraisal rights in the US, this protection mechanism remains underutilized by shareholders in the EU. After discussing the general framework for merger transactions in the US and the EU, the present chapter will seek to offer an examination of appraisal rights in the US and the EU. Furthermore, it will discuss how shareholders, and in particular hedge funds, exploit the appraisal remedy in order to reap profits and assess the dangers posed by this practice. Finally, the paper will seek to decipher the factors that have led to the surge of the appraisal remedy in the US and its underutilization in EU.

On October 24th, LexisNexis, CSC, and law firm Potter Anderson & Corroon LLP will present a webinar on the Delaware Limited Liability Company Act, covering 2019 amendments and recent caselaw. Topics will include contractual appraisal rights – as well as mechanical issues involving electronic signatures, LLC series and other changes.

The webinar registration can be access here.

JD Supra posted about the availability of freeze-out mergers as a legal avenue for majority owners of private companies in Texas. The author noted that the freeze-out merger is a legal avenue that is “used with some regularity in Texas and is rarely disallowed by the governance documents of most companies.” According to the post, minority members who are being frozen out may be able to exercise their dissenter rights and receive “fair value for their interests.” We have previously posted about dissenter rights in Texas, and about appraisal in freeze-out mergers, where appraisal may be the only real avenue of recovery for an aggrieved investor.

Turkish Commercial Code No. 6102 (TCC), which entered into force on July 1, 2012, brought many novelties to form a modern vision of commercial law, whereas the former rules were inadequate to meet the needs of the practice. The focus was mainly on transparency, auditability, and equivalence among shareholders, and the relevant legislation has adopted new principles with respect to corporate governance and shareholders’ rights.

As part of these novelties, the TCC provides categories of important reasons that allow joint stock companies to reject the transfer of registered shares under their respective articles of association (AoA), while the former code did not enable a shareholder who voted against any corporate change in the company to sell its shares to the company at a fair value.

As regulated under Article 493 of the TCC, the company may choose not to approve the share transfer by claiming an important reason stated under the AoA, or to acquire the shares to be transferred on its or a shareholders’ or any third party’s behalf by offering nominal value of the shares to the transferee.

If the company prefers to use an escape clause, the nominal value of the shares must be offered to the transferee. Since there is no definite basis for how the nominal value of shares will be determined, transferors generally apply to the court for a determination of the nominal value of the shares to be transferred. If the transferee is offered a nominal value and does not reject such value within one month of its acknowledgment, the acquisition offer will be deemed accepted. If the company remains silent for a period of three months from the date of the transferee’s application for approval, it will be deemed that the company has approved the share transfer. As long as the company does not approve the share transfer, the ownership of shares will remain with the transferor, together with all monetary and management rights.

In addition to the above, the TCC has further regulated that an escape fund be paid to shareholders in the event of a merger or change in the type of company. In this regard, if the shareholders disagree with a merger or change in the type of company, they have the right to sell their shares to the company at a fair value.

Notwithstanding the above, the capital market legislation specifically regulates the types of significant transactions, obligatory procedures of those, concept of appraisal rights granted to the shareholders, and mandatory takeover bids in publicly held companies.

According to the Communiqué on Common Principles regarding Significant Transactions and the Appraisal Right, mergers, division transactions, change in the type of company, or termination, along with other important transactions listed in article 5, require general assembly (GA) approval. This communiqué details the provision regarding the use of appraisal right. In this context, shareholders who voted against a significant transaction at the GA meeting and had their dissenting vote recorded in the minutes of that meeting will be able to sell their shares to the subject company at a price equal to the average of the weighted average trading prices of the company’s shares for the last 30 days prior to the announcement of the transaction.

Similar provisions are also recognized for mandatory tender offers arising from a significant transaction. Pursuant to the Communiqué on Squeeze Out Rights, if the voting rights held by a shareholder reach 98% through a tender offer or otherwise, or such shareholder acquires additional shares when he or she is already above this threshold, then the minority shareholders will have right to sell their shares to the controlling shareholders, and the controlling shareholders will have the right to squeeze out any remaining minority shareholders at a price equal to the 30-day average of the weighted average price of the same class of shares on the stock exchange prior to the controlling shareholders reaching 98%, or if already above 98%, prior to the public announcement of the purchase by the controlling shareholders.

As a final note, the squeeze-out rights cannot be exercised during the first two years after the initial listing of a company’s shares on a stock exchange, and the timeline set out in the relevant communiqué will need to be followed for use of such right.

*Lowenstein Sandler thanks Görkem Bilgin, Managing Associate at Gün + Partners, for his contributions to this blog.

Per Law360 [$$$], the Delaware Superior Court granted a joint motion for interlocutory appeal from its prior order denying summary judgment to the insurers and causing a flurry of analysis of the opinion, which opened the door for D&O insurance to cover appraisal claim defense costs and prejudgment interest. See our prior coverage here and here.

The grant of interlocutory appeal allows the insurers to now appeal to the Delaware Supreme Court and challenge the denial of summary judgment in that court.

South African firm Cliffe Dekker Hofmeyr (CDH) has published this analysis discussing the mechanics of South African appraisal – a jurisdiction we’ve covered multiple times before. The relatively new appraisal remedy in that country is maturing quickly as courts continue to grapple with various appraisal issues. In the most analysis, CDH discusses a case where a shareholder dissents from the merger, ‘demanded’ appraisal by instituting an appraisal application for determination of fair value, but then withdrew the application based on legal advice they received about ‘standing’ (or similar). In the process, the shareholders (or at least alleged-shareholders) allowed the Company’s fair value offer lapse. Could these alleged-shareholders, who withdrew their appraisal application, step back into their old position – basically, be ‘reinstated’ to their rights despite the fact that the Board’s offer lapsed? Yes, the Court said, according to CDH – the relevant statute did not remove rights of dissenters even if they rejected (or let lapse) the board’s offer.

While South African appraisal law obviously has its own twists and turns (and note that Lowenstein Sandler LLP does not practice in South Africa), some of the procedural aspects of this case harken to a little noticed provision of Delaware appraisal law: the “60 day option.” In sum, a stockholder may dissent, demand appraisal rights, and if they do not file a petition (or join an appraisal proceeding as a named party), they can withdraw their appraisal demand within 60 days and receive merger consideration. This 60 day option can be powerful – Carl Ichan used it to great effect with Dell – both as a chance to do further investigation and also to better understand the landscape of dissent.

*Lowenstein Sandler LLP does not practice in South Africa.

We’ve written before about the follow-on decision from Solera* which found that an appraisal claim can count as a “securities claim” for D&O policy purposes – see Lowenstein’s alert on the topic. Coverage of that decision continues.

*Lowenstein Sandler was counsel to petitioners in the underlying Solera appraisal case.

We’ve covered before how drag-along provisions and other contractual provisions can involve the waiver of appraisal rights. Recent caselaw from Delaware has made it clear that in at least some instances, a contractual waiver of appraisal rights is enforceable.

In particular, the Authentix decision, discussed at length by various authors here (law firm), here (law firm), here (blog), and here (legal blog), held that at least in the circumstances in that case, involving sophisticated parties represented by counsel, where the parties were fully informed, and the agreement unambiguously waived appraisal rights, the contractual waiver would be enforced. The Court did not lay out which of these factors were necessary or sufficient.

Harvard Law’s Corporate Governance Blog notes that Authentix may be contrasted with a decision also from Delaware, In re Altor BioScience Corporation. There, an ambiguous provision that defendants contended waived appraisal rights (along with breach of fiduciary duty claims). The Court enforced the alleged waiver of the fiduciary duty claims, but did not find that the covenant not to sue barred appraisal claims. Notably, the Court held that without an express and affirmative waiver of appraisal rights, the waiver could not be enforced as appraisal is a statutory right.

As we have noted before, getting the basics right is important in the world of appraisal. For example, if appraisal rights are available to shareholders, then an appraisal notice must get that right. Simpler still, as an article in Forbes reminds readers, in any M&A transaction, whether appraisal rights exist and whether shareholders need to be notified should be considered.

This is especially true as the existence of appraisal rights is a jurisdiction-specific, and sometimes fact specific (and transaction specific) inquiry. We’ve noted before that while appraisal rights may exist in one jurisdiction, and not in another, jurisdictions may also differ on the kinds of transactions offering appraisal rights, and even on whether the buyer’s shareholders get appraisal rights.

In any M&A transaction, consideration of appraisal rights should be on the checklist.