January 2016

We have blogged before (see here) about a then-forthcoming law review article by Professors Charles Korsmo (Associate Professor at Brooklyn Law School) and Minor Myers (Associate Professor at Brooklyn Law School) analyzing the value-creation resulting from the increased use of appraisal arbitrage.  The authors’ paper has now been published in the final 2015 issue of the Washington University law review: http://openscholarship.wustl.edu/law_lawreview/vol92/iss6/7/

While there have been some revisions to the final version, their underlying data points, arising from their study of all Delaware appraisal cases for the ten-year period from 2004 to 2013, remain intact.

In this working paper (available via SSRN), “Influencing Control: Jawboning in Risk Arbitrage,” authors Jiang, Li, and Mei consider the use of appraisal strategies, among others, by the so-called “activist” investor. In studying instances of appraisal arbitrage, among other activist strategies, the authors conclude that activist investors can utilize a variety of tools – including appraisal – to realize abnormal returns on M&A transactions.

In particular, Table 7 of the attached article (pages 50-51) presents the results of their analysis of such abnormal returns. The sample used in this study included only 14 mergers with appraisal actions, but their findings on “appraisal returns” are interesting: “The average (median) appraisal return is 15.6% (19.6%). The average (median) length between deal completion and the appraisal decision is 1,043.1 (1,106) calendar days,” or just over three years (footnote 14). In addition, Appendix A analyzes the Golden Telecom decision as an illustrative case in their study, in which the appraisal strategy experienced an annualized return of 15%.

As a result of the recent increase in the Federal Reserve discount rate, statutory interest in appraisal cases is now up to 6%, compounding quarterly.  The discount rate had been 0.75% from February 19, 2010 through December 17, 2015, at which time it was increased to 1%.  As the appraisal statute sets interest at 5% over the Federal Reserve discount rate, the recent .25% increase pushes the appraisal interest rate up from 5.75% to 6%.