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.”

In Kahn v. Stern, an opinion issued by the Delaware Court of Chancery mid last year, the Court dismissed a breach of fiduciary duty claim seeking, among other remedies, quasi-appraisal damages.  The case arose out of the sale of Kreisler Manufacturing Corporation (“Kreisler”), a small, thinly-traded (listed only on the pink sheets), public aerospace manufacturing company, to Arlington Capital Partners (“Arlington”).  The merger was approved by written consent of a majority of Kreisler’s outstanding shares, without a stockholder vote, and was announced on May 31, 2016.  That same day, Kreisler distributed an information statement to its shareholders to inform them of the deal and allow them to decide whether to exercise their appraisal rights—the deadline for seeking appraisal was June 20, 2016.  Notably, the merger agreement contained an “appraisal out” provision that permitted Arlington to back out of the merger if more than 10% of Kreisler’s outstanding shares sought appraisal (see our prior posts discussing such provisions here, here, and here).  The plaintiff, however, did not seek to enjoin the merger pre-close or exercise his appraisal rights by the appraisal cutoff.  Instead, the plaintiff filed a complaint for breach of fiduciary duty against the Kreisler board days after the appraisal deadline had passed.

The complaint, among other things, alleged that the Kreisler board breached its fiduciary duties by: (1) approving the transaction in light of certain “side deals” that were negotiated by two inside directors in connection with the merger, and (2) making misstatements and omissions in the information statement provided to Kreisler’s shareholders.  With regard to the disclosure claims, the plaintiff alleged that the defendants knowingly withheld or misrepresented material information in the information statement to reduce the likelihood that Kreisler’s shareholders would prevent the merger by asserting appraisal rights, and in so doing, the defendants deprived Kreisler’s shareholders of their ability to make a fully informed decision regarding their appraisal rights.  In light of the injury caused by these alleged disclosure deficiencies, the plaintiff sought quasi-appraisal damages.

In deciding the disclosure claims, the Court noted that if the plaintiff had sought injunctive relief before the merger closed, such relief may have been warranted.  The Court explained that, in the pre-close, injunctive relief context, the Court would have applied enhanced scrutiny and looked to whether the information statement withheld or misstated information material to the stockholders’ decision to approve the deal or seek appraisal.  In the post-closing, damages context, on the other hand, the Court explained that the plaintiff must have alleged facts making it reasonably conceivable that the director defendants, who were found to be independent and disinterested and were protected by an exculpatory charter provision, acted in bad faith in issuing the disclosures.  The Court found that nothing in the record, even in light of the side deals and appraisal-out provision, created an inference that the alleged disclosure deficiencies were made in bad faith.  Thus, the Court dismissed the disclosure claims, which included the plaintiff’s request for quasi-appraisal damages.

For additional insight on the Court’s views on the quasi-appraisal remedy, see our prior post here.

In a recent article on PolicyHolder Pulse attorneys from Pillsbury explore whether Directors and Officers (“D&O”) insurance covers, or could be considered to cover, Delaware appraisal claims.  Critical to this analysis is whether an appraisal case raises issues of “Wrongful Acts” by the Board – including, for example, collusive behavior, or other process defects.  The Pillsbury authors note that appraisal claims are often (though not always) coupled with breach of fiduciary duty claims (something that occurred in Dole), which involve claims of wrongdoing.  Of course no proof of wrongdoing, or even of defective process, is necessary for a successful appraisal action.  They also suggest Securities Claim coverage may be available, depending on the terms of the specific policy.  D&O Diary, after discussing the arguments made, summarizes the article as finding that there “may be substantial grounds” for arguments in favor of coverage.

The ABA Business Law Section, Spring Meeting, shared this presentation, laying out some useful information regarding the Depository Trust & Clearing Corporation. The material is of particular relevance to those interested in appraisal rights; the continuous holder requirement – which requires appraisal seekers to have continuously held their stock from the time of making their appraisal demand through the deal closing – requires a petitioner to overcome procedural hurdles in order to exercise appraisal and make sure their claim is not subject to challenge. This presentation gives an overview of some of the recent case law, including the Dell matter, for those interested in the nuts and bolts of exercising appraisal rights.

Blockchain: The idea of distributed ledger technology – usually associated with “cryptocurrency” like bitcoin – may be coming to the world of appraisal rights in the near future. As reported by Bloomberg BNA, Delaware’s legislature is considering facilitating the use of blockchain technology with respect to share ownership. As recent cases have shown, pursuit of appraisal rights is critically related to an understanding of the actual system of share ownership involving the Depository Trust & Clearing Corporation and intermediaries in the U.S., a process that, for the appraisal claimant, can be fraught with peril. Blockchain is one potential solution to simplify the record keeping of who owns what shares and how they own them. The relevant proposed legislation is available here.

Cooley LLP highlights that increased appraisals are being factored into mergers.  Following up on a previous piece, Cooley LLP notes that appraisal costs can be large, referencing the over $50 million added to the merger price in Dell, and further comments on the rise of appraisal claims, which Cooley calculates as a 267% increase from 2012 to 2016.   We’ve posted previously on the uptick in appraisal filings, and how the August 2016 amendments may further increase filings, as well as what this means for investors interested in the strategy.

We posted recently about attempts by M&A buyers to include a closing condition in the merger agreement that would relieve the buyer from closing if a triggering percentage of appraisal rights are exercised.  As an illustration of such a condition, CBOE Holdings — which owns the Chicago Board Options Exchange — succeeded in including a so-called blow provision in its merger agreement to acquire another exchange operator, Bats Global Markets.  Under that merger agreement, the deal blows up if more than 20% of the target’s outstanding shares seek appraisal.

The very existence of a blow provision may cause some stockholders to hesitate in seeking appraisal, fearing that their dissenting vote might push the appraisal class over the 20% hurdle.  Some casual observers find that only about 10% or less of the outstanding share population ultimately seeks appraisal.  Accordingly, a lower blow provision, on the order of 10% or 15%, could pose a very real challenge to appraisal and would test the resolve of stockholders who are unsatisfied with the deal price but concerned about blowing up the deal altogether.  That may be true, for instance, where dissenters feel that the target is being sold at the right time but at the wrong price.

Cleary Gottlieb’s M&A blog’s recent post, Negotiating Appraisal Conditions in Public M&A Transactions, analyzes attempts — sometimes successful — by acquirors of Delaware public companies to include a closing condition in the merger agreement that would relieve the buyer from closing if a certain triggering percentage of appraisal rights are exercised.  Their post discusses the negotiating and drafting of such thresholds and related provisions.