While some of the largest businesses in the United States are corporations (i.e., incorporated entities under a state’s corporations law), many businesses today are also formed as Limited Liability Companies, LLCs for short. An LLC is a creature of state statute; Delaware, California, Florida (among many other states) have LLC statutes allowing for the creation of this often modular business form. LLCs have “members” who own interests in the LLC. Do members have appraisal rights? Depends on the state.

Some states, notably California, Florida, Minnesota, New York, and Washington provide for statutory appraisal rights for LLC members. Other states, including Delaware and Arizona, provide LLC members appraisal rights only if the operating agreement provides for appraisal rights – effectively allowing an LLC member to contract for appraisal rights in the formation documents. Why would someone include appraisal rights in an operating agreement? One answer, coming from Arizona law, is that providing for an “out” via appraisal rights may allow a dissenter to be bought out at fair value, instead of encouraging the dissenter to seek dissolution of the LLC as a remedy for their oppression. And, of course, an investor may insist on an appraisal condition in the operating agreement.

In “Appraisal Arbitrage: In Case of Emergency, Break Glass” – a student note published in the Notre Dame Law Review (93 Notre Dame L. Rev. 2191) – the author lays out a case for why appraisal, including appraisal arbitrage, remains critical to the overall scheme of shareholder protection. As the author observes, many a critique of appraisal focus on the “who” of recent appraisal cases, focusing their attention on the appraisal arbitrage strategy and decrying that arbitrageurs (as opposed to, one must believe, long term shareholders who may not be as well positioned as arbitrageurs to pursue an appraisal case) are bringing appraisal cases at all. The student note points out that this focus on “who” has lost sight of “why” appraisal exists in the first place and what has been revealed by many of the appraisal cases of the past: many appraisal cases are meritorious in that they reveal (and result in) premia to below-fair-value merger prices. The author also highlights critical research on what the appraisal remedy does for even shareholders who don’t exercise it: brings up merger premiums. The note concludes with a worthy summation of why appraisal remains a valuable remedy in the shareholder arsenal: “appraisal still has value as a deterrence method and as protection for minority shareholders. Shareholders need a functioning emergency switch in the form of the appraisal remedy, and Delaware, whatever its next actions in this space, must tread carefully to preserve it as such.”

The Review of Securities & Commodities Regulation recently published “The Shift in Delaware Appraisal Litigation” (full article $$$), suggesting, as have other authors, that Delaware appraisal has moved to a realm where process questions are central to the appraisal analysis. This will be little surprise to readers of this blog; while appraisal is distinct from fiduciary claims, recent cases have focused increasingly on a search for process issues, and the absence of issues with the sales process has led some Delaware Chancellors to conclude that merger price (or other price) is the proper measure barring such process issues. Whether that will continue as the caselaw develops in 2018 is yet to be seen; and as Court’s clarify what can be problematic about a process we may well see decisions giving greater clarity to where one can expect the “shift” to take us.

Probably – at least according to this analysis posted on the Harvard Corporate Governance Forum.  The analysis provides extensive discussion of Norcraft and Solera**, two recent decisions we’ve also noted.

The authors conclusion will be familiar to regular readers of this blog: “appraisal decisions likely will continue to focus on many of the same issues that courts examine when considering breach of fiduciary duty claims in the merger context as well as assessing whether the seller’s stock trades in an efficient market.”  As other authors have suggested, sales process and market efficiency may be the new focus of appraisal proceedings – seemingly a litigation crossover from fiduciary duty litigation (as to process) and fraud litigation (market efficiency).

** This firm is counsel of record to petitioners in the Solera matter.

State legislature somewhat regularly make amendments and updates to their corporate laws, including laws regarding appraisal.  We’ve covered Delaware updates before, including the 2018 and 2016 amendments.

North Carolina, another state with appraisal rights, made updates to its appraisal laws as well this year.  Senate Bill 622, signed into law in June, took effect as of October 1.

North Carolina’s amendment extends appraisal rights to non-voting shares of a corporation, which is a change that brings North Carolina into line with Model Business Corporation Act.  Notably, the Model Act originally did not provide appraisal rights for non-voting stock; but the Model Act itself was amended, and now North Carolina has amended as well.  The amendments also make changes to the exercise of appraisal in “second-step” mergers following a tender offer, which is something Delaware’s 2018 amendments have also addressed.  For more on the North Carolina amendments, including discussion of the amendments that are not appraisal-oriented, see these articles.

Earlier this year, a Florida appeals court adopted the Trulia decision from Delaware – In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016) being a key Delaware case regarding the approval of merger related class action settlements. Before Trulia, class actions challenging mergers could (and often did) resolve via something called a “disclosure only settlement” – that is, the target company resolved the class action by making additional disclosures related to the deal but did not enhance the cash value consideration to stockholders. Trulia presented a new reality that such settlements would not be approved.  Many commentators saw this as a serious blow to class actions challenging mergers (the major form of pre-closing merger challenge).

As the authors of the linked article observe, post-Trulia, appraisal claims increased. While the linked article does not deal with the reason Trulia may be linked to increased appraisal, readers of this blog may see the connection immediately. Appraisal actions can be driven, in part, by a lack of information (or an asymmetry of information) between the target/acquirer and shareholders. Pre-Trulia, pre-closing class actions were more common; even if they did not result in increased consideration, the extra disclosures could provide additional information to the marketplace. And, for shareholders considering appraisal, an indicia whether pre-closing discovery yielded a ‘smoking gun’ – or additional information that showed the merger undervalued the target. The settlement also acted as a ‘bought release’ – releasing the breach of fiduciary claims (pre-closing!) for the class. But post-Trulia, as such cases have seen diminished use, shareholders are left with less information, classwide pre-closing releases are less prevalent, and thus post-closing remedies gain in importance: hence, appraisal.

Will Florida see an uptick in appraisal now that a Florida appeals courts has adopted Trulia? One would think it likely.

Does D&O insurance cover appraisal?  Last year we discussed this topic – and now Solera Holdings** has sued its D&O insurance providers alleging that they have refused coverage for the costs of the appraisal action as well as the interest Solera owes.

Here again we see an appraisal proceeding resulting in further litigation after the fact – here an insurance action, to go with the securities fraud actions we’ve seen before and breach of fiduciary duty litigation as well.

** This firm is counsel of record to petitioners in the Solera matter.

Cayman Appraisal will be on the docket at the Cross Border Litigation & Restructuring seminar in Hong Kong on October 9.  In a program titled “Valuation 101: Section 238 Applications” presenters will cover “Cayman Islands Appraisal Rights: How to determine a fair stock price and what are the relevant remedies for shareholders? What weight will merger price be given in an appraisal action bidding process?”

Readers of this blog will recall that Cayman appraisal has been a hot topic recently, specifically with respect to Chinese companies with foreign listings.

M&A Law Prof Blog says no.

In short, the market out exception (at least in Delaware) provides that a shareholder does not have appraisal rights if they are receiving stock and not cash for their shares in the target company. M&A Law Prof Blog compares the current state of appraisal (including the market out exception) with the premise that appraisal came about at a time when mergers were generally for stock, and thus appraisal gave one the ability to force (via appraisal) cash consideration instead of stock. The opposite of how the market out exception works today.