The July 2015 article “Appraisal Arbitrage – Is there a Delaware Advantage?” by Gaurav Jetley and Xinyu Ji of the Analysis Group analyzes the extent to which economic incentives have improved for appraisal arbitrageurs in recent years, which the authors believe helps explain the “observed increase” in appraisal activity. The article concludes that appraisal arbitrageurs enjoy an economic benefit by delaying their investment until after the record date, as they are privy to better information about the target’s value while minimizing their exposure to the risk of deal failure. The study also finds that the Delaware Chancery Court utilizes a lower equity risk premium than do the financial advisors handling the deal itself, resulting in another benefit to arbitrageurs (and, one would think, historical holders as well). Finally, the authors conclude that the statutory interest rate more than compensates appraisal petitioners for the time value of money.
Based on these findings, the authors propose several policy recommendations, including (i) a limitation on the arbitrage strategy by reducing stockholders’ ability to seek appraisal for shares acquired after the record date, and (ii) enactment of the proposal by the Council of the Delaware Bar Association’s Corporation Law Section (which the Delaware legislature has not enacted) to allow appraisal respondents to prepay claimants some portion of the merger consideration in order to limit the interest accruing during the pendency of the case. On this latter point, the authors likewise acknowledge that allowing such prepayment is tantamount to funding claimants’ appraisal actions, thus potentially spurring on funds to increase their arbitrage strategy as they can redeploy such prepaid capital to the next case.