Delaware judges, SEC leaders and lawyers from across the country convened in New Orleans last week for the 27th annual Tulane Corporate Law Institute, a two-day series of panels on March 19-20 analyzing Delaware corporate law and M&A deal making. Appraisal arbitrage garnered considerable attention as several panels discussed the practice as well as the proposed legislation by the Corporation Council of the Delaware bar, which avoided any proposals to eliminate or limit the practice. Several panelists were highly critical of the Delaware bar council for its refusal to curb appraisal arbitrage in any way, and expressed skepticism over the council’s findings that arbitrage did not stoke strike suits but instead advanced the statutory aim of investor protection. In response to such criticism, Chief Justice Strine of Delaware’s Supreme Court observed that the reaction by arbitrage critics is overblown, and that the arbitrage phenomenon may well die down over time because funds that recover the merger price alone will not recoup their litigation expenses. Accordingly, he predicted that the so-called event-driven funds pursuing appraisal arbitrage will be more selective in picking their spots and there may well be fewer of them down the road, and fewer such arbitrage plays, as a result.
On the related subject of interest — and the proposed legislation to allow acquiring companies to stop the statutory interest on at least a portion of the disputed amount by permitting them to prepay a cash amount, in whatever amount they may choose, on a non-recourse basis — Chief Justice Strine again chided the appraisal critics (who would prefer to see even further reductions to the interest component) by suggesting that the statutory interest award, even at 5% above the Federal Reserve discount rate, still does not compensate shareholders enough for being out of their money pending the appraisal litigation, especially in the past three years, during which time the statutory interest rate alone fell well below any credible market index. The Chief Justice also observed that the legislative proposal allowing a non-recourse prepayment could itself eliminate or reduce much of the interest arbitrage pursued by petitioners. Another panelist responded later in the day that the proposed prepayment legislation would not at all chill appraisal petitions, because the prepayment mechanism will only incentivize shareholders to redeploy their capital to pursue the next appraisal petition.
In sum, the Chief Justice closed his discussion by stating that appraisal rights enhance shareholder value and play a systemic role in promoting fair treatment. Indeed, as he explained, unlike fiduciary duty actions, appraisal rights cases do not yield “disclosure only” settlements (which the courts tend to frown upon), and they are not pursued on a class basis and settled for “garbage.” Thus, he concluded that the state of appraisal rights is not in crisis, and when the new proposals and the current case law play out, the incentives will require that only serious cases be brought.