The vast majority of publicly announced mergers are approved by shareholders, certainly more than 90% no matter how you reasonably slice the data.  One way to view this data is that shareholder votes are perfunctory rubber stamps; but another is to view the merger process as self-selecting – a publicly announced merger is one that acquirer and target believe will receive shareholder approval.  In the latter case, the threat of failure is the motivating factor that effects the offer price pre-announcement; it is not the vote itself.  And we see this in practice as well.  It is the incredibly rare instance where an acquirer makes in seriatim bids, watching each fail in turn trying to find the price that gets the acquirer the necessary votes: we just don’t see this, period.

And if the vote itself is not what generates value to shareholders, then what of the costs of the vote itself?  Voting takes time – sometimes a long time.  This fact particularly intersects with appraisal since when is an important question when determining value.

Professor Matteo Gatti takes on the question of reducing the cost of merger voting in his 2018 article “Reconsidering the Merger Process: Approval Patterns, Timeline, and Shareholders’ Role.” [pdf via Hastings Law Journal].  The Professor proposes three potential reforms: (1) on-demand voting (meaning a threshold number of shares, perhaps 10%, must request a vote for a full vote to be needed); (2) randomized approval (meaning only a certain percentage of proposed mergers would be subject to a vote, but without knowing if their merger would be selected, the management teams would still be under threat and thus exercise their obligations to maximize value; while the non-selected mergers would get a more efficient approval); and (3) shorter approval timelines (shorten the SEC review process; shorten the 20 days Delaware requires for investor consideration of a preliminary proxy; etc.).

How would these changes affect appraisal?  While Professor Gatti seeks to preserve appraisal rights in any of the proposals, changes would obviously be required to maintain the appraisal remedy; and more importantly, to retain a robust appraisal remedy that continues to provide enhanced premia to shareholders in mergers.  Notably, in any proposal eliminating instances where every shareholder is given a voting opportunity (such as proposal 2, randomized approval), it may be incumbent on the legislature or courts to formalize the view that while voting “yes” on a merger is a bar to appraisal rights, any other action, including silence in the case that voting rights are not actually provided, abstention, or voting no, preserves appraisal rights.  No doubt these are interesting proposals to change the merger process, and the appraisal remedy could surely be adapted to any of them.

One other idea for making voting more efficient?  Blockchain – something we’ve covered multiple times before.

Appraisal cases increasingly focus on how markets react to merger news and what one learns from that.  Recent cases that have looked to “unaffected” merger price – that is, the price of a share of the target company before the merger announcement – in part because of the fundamental truth that mergers are market moving events.

So are the breakup of mergers. The case of Fresenius and Akorn, pending before Vice Chancellor Travis Laster, while outside the realm of appraisal, has seen the Vice Chancellor asking questions of the parties very close to the kind of questions one sees in appraisal. As this analysis from Law360 [$$$] discusses, the Vice Chancellor pressed the parties’ lawyers on how the market was valuing Akorn with the uncertainty of the merger. While ‘merger price’ in the deal is $34 a share, Akorn trades for less than $20 a share – and the Vice Chancellor noted that without a deal at all, one would imagine the market price would be even lower.

This line of questioning – and the economic principles underlying it – suggest more than such a limited reading. Akorn’s market price is a reflection of information and risk. Certainly, even if Akorn was an incredibly attractive asset at $33, any buyer would need to consider the mess of the litigation, and the risk that Akorn is force-sold to Fresenius, in their valuation. This analysis highlights the fact that a pending merger bid (no less pending merger litigation) can distort the market price – something that the appraisal remedy aims to address.

For more on the Akorn Fresenius litigation, see the Law360 coverage [$$$].

Fresenius has prevailed at the Chancery court level.

Appraisal rights are creatures of statute, and as a result, for the most part, the conditions for appraisal are laid out by the legislature. Many statutes provide for appraisal rights in instances where there is a “merger” – what one might traditionally understand as an entity purchasing another entity, or purchasing all the stock of another entity. But merger-esque corporate actions can come in numerous flavors and types, and not all of them will carry appraisal rights. In many instances, the merger-esque transaction is not termed a merger at all, a notification of appraisal rights is not generated, and investors may be left in the dark about the fact that a merger-in-fact (but not called a merger) is occurring where they have valuable appraisal rights.

Enter the de facto merger doctrine. The de facto merger doctrine, usually associated with successor liability, looks to the underlying reality of a transaction to determine if it is actually a merger (and thus, would usually carry appraisal rights), or something else (that may not). Professor Bainbridge recently explored this topics with respect to California, highlighting a difference between California (which recognizes the doctrine) and Delaware (whose courts have a very restrictive view of the doctrine, to the point it is not often available).

In the context of appraisal, and in light of the Dr. Pepper decision we covered before, it’s important to note that not every transaction termed ‘not-a-merger’ will be free of appraisal rights. Critically, Dr. Pepper is a Delaware case.  Appraisal rights in other states may well be available for de facto mergers where those states have a more expansive view of the de facto merger doctrine than Delaware does. The name of the transaction does not always control, and doing a careful evaluation of the transaction is critical to determining whether there may be otherwise unexplored remedies for an aggrieved investor.

While appraisal is typically a creature of statute, appraisal rights can also be a creature of contract–in particular, when an operating agreement, charter, or similar foundational document provides for them (including when a certificate of designation provides for the value of preferred stock). Many states, including New York, allow the members of an LLC–as an example–to include appraisal rights in the operating agreement. While we often cover appraisal on this blog as a statutory remedy focused on shareholder protection, negotiated appraisal rights can be a part of a corporate lawyer’s suggestion box in trying to get a deal done. A minority investor concerned about his or her minority status may be comforted by an appraisal rights mechanism in the foundational documents. Similarly, an investor who is contemplating a minority investment may wish to negotiate for an appraisal provision precisely because it can give an “out”–and, at minimum, bargaining power–if the minority investor sees issues with an otherwise-aboveboard merger. Because appraisal rights are different than breach of fiduciary duty claims and are a post-closing remedy, the minority investor can also point out that appraisal may be a viable remedy in lieu of filing a lawsuit seeking injunctive relief and attempting to block corporate action. This trade–giving up some rights before the closing in exchange for a post-closing remedy–allows the minority and majority investors to protect themselves while potentially creating value for both in the transaction.

In Delaware, appraisal is a creature of statute. It is a statutory claim, born from 8 Del. Code Section 262; it is a claim in its own right, but it also carries with it statutory requirements. Appraisal requires that the right kind of demand be sent at the right time by the right entity. Quasi-appraisal is a creature of the common law and, as lawyers from Blank Rome observe in a growing concern for deal lawyers. Whereas appraisal rights claims are basically individual in nature, quasi-appraisal has been brought as a potential remedy for a class of all shareholders who have otherwise foregone their appraisal rights.

The differences between appraisal and quasi-appraisal go deeper than just their source in statute or common law. While appraisal is a well-defined “claim” in its own right, quasi-appraisal is far more akin to a remedy than to a claim. While both demand a determination of “fair value,” the vast majority of Delaware case law determines fair value within the confines of the statutory appraisal scheme, including, for example, a bar on considering synergies. Quasi-appraisal is more “amorphous”–as the authors observe–and can frustrate predictability in a merger. Whereas appraisal claims must, by statute, be known (and pressed) at a certain time, quasi-appraisal remedies/claims can pop up later, after the appraisal window has closed.

The authors of this piece also point out that unlike appraisal, the quasi-appraisal remedy is often connected to a breach of fiduciary claim (note that appraisal claims require no breach of any duty and require no proof of any wrongdoing by anyone). Breach of fiduciary duty claims, in turn, are directed at the corporate officers and directors, not the company itself, and those officers and directors, in turn, may have indemnification rights from the company or the insurance that covers claims against them. The takeaway then is that a when a party is seeking quasi-appraisal, it may well involve many more parties and may come up at a time well past the otherwise statutorily set appraisal window. As the authors observe:

[A]s quasi-appraisal claims continue to increase, the predictability that comes with the timely perfection of appraisal rights may be lost. Buyers may need to consider more than just the number of dissenting stockholders and, more specifically, also consider if a class of all (or most) of the stockholders would or could pursue a quasi-appraisal claim against the seller’s former directors for which the buyer might have indemnity responsibility. … [The] intersection of quasi-appraisal remedies and directors’ indemnification rights could put a buyer potentially at odds with a seller’s former directors, and highlight further unanticipated deal risks. Navigating these changing tides in Delaware corporate law is of critical importance, particularly for buyers, and these considerations should receive appropriate attention in the early stages of the deal negotiations.

As shown in a presentation to the Association of Corporate Counsel, despite predictions (and calls) for the death of appraisal, it remains prominent in discussions of M&A trends. In the May 10, 2018 presentation, attorneys from Cadwalader discuss their view of “Dell-Compliance” – noting a series of factors that would make a deal more likely or less likely to reflect fair value. For example (in this instance, using AOL as an example), a company that was approached by “other logical buyers” with a good merger process and without a prohibitive breakup fee is, according to the authors, more likely to be Dell-compliant than a deal where a buyer had an informational advantage, there was a no shop provision, and the existence of public statements by management all augured against Dell-compliance.

Can a block of appraisal demands derail a merger?  In South Korea, they certainly can. In the recent Hyundai-Mobis deal, involving a transfer of assets by Hyundai of assets from one Hyundai entity to another Hyundai entity, the deal contains a 9 percent “appraisal condition.” If 9 percent of shares demand appraisal, Hyundai may be forced to kill the deal – or else pay 2 trillion SKWon ($1.8BB USD).

We’ve posted before about appraisal ‘blow’ provisions. And mid last year, media reports speculated on whether appraisal filings (in that instance, looking at the US) would cause companies to take steps to address appraisal risk. With the Hyundai deal, we see an example of this in action.

Some authors have noted that appraisal has become the disciplining remedy for the fiduciary duties of corporate managers. This may be true, regardless of the fact that appraisal is an independent and distinct remedy from fiduciary duty litigation. But sometimes the two are inextricably bound.

In late February 2018, the Delaware Supreme Court handed down a decision in Appel v. Berkman, No. 316, 2017, 2018 WL 947893 (Del. Feb. 20, 2018), wherein stockholder-plaintiffs brought an action against the corporate directors of Diamond Resorts, alleging breaches of fiduciary duties with respect to merger disclosures. In Appel the plaintiff alleged that, pre-merger, Diamond failed to disclose to shareholders the concerns of the board chairman (and founder of the company), who was also abstaining on the merger itself–what the Supreme Court described as “no common thing.”

In discussing the importance of the disclosures, the Court observed that the “founder and Chairman’s views regarding the wisdom of selling the Company were ones that reasonable stockholders would have found material in deciding whether to vote for the merger or seek appraisal …” And further, it observed that the lack of the disclosure in this case was not inactionable just because the stockholder plaintiff tendered his shares–concerns outside the disclosures, such as the costs of litigation and the fact that capital can be tied up in appraisal (subsequently mitigated in some respects by legislative changes providing for prepayment), may well motivate a shareholder.

Here we have an example of disclosure litigation and appraisal being intertwined. While appraisal is a post-closing remedy, and thus a shareholder seeking appraisal does so after the merger and with whatever disclosures were made as they are, the Supreme Court recognizes that the disclosures themselves, if fulsome and sufficient, may motivate investors to seek appraisal. When those disclosures are deficient, one of the impacts may be denying investors who have rightful appraisal remedies a fair chance to decide.

See the decision in Appel here.

Cooley LLP provided a recap of 2017 M&A, along with an outlook for 2018 for Lexology, which includes a discussion of appraisal conditions in private M&A deals. We have blogged previously about the possibility of acquirers including appraisal conditions in public deals.

This 2018 M&A Outlook is a good reminder of the role that appraisal plays in mergers of non-public companies. As Cooley observes: “While the inclusion of any appraisal rights condition remains uncommon in public deals, we commonly negotiate these conditions in private sales of venture-backed companies. Commonly accepted conditions take one of two forms: the absence of available appraisal rights altogether or appraisal rights not having been exercised by a certain percentage of shares.” The piece further suggests the legality of any such advance waivers of appraisal rights “has not been resolved by the courts.”