Gregory V. Varallo of Richards Layton & Finger, P.A. discusses takeaways from the “The Continuing Impact of Appraisal Rights” panel at the 30th annual Tulane Corporate Institute. At the two-day series of panels on Delaware corporate law and M&A deal making, which took place on March 15-16 in New Orleans, appraisal rights remained a hot topic.
The Harvard Law School Forum on Corporate Governance and Financial Regulation recently posted an analysis by Wachtell, Lipton, Rosen & Katz of the Delaware Supreme Court’s recent decision in SWS, summarily affirming the Delaware Chancery Court’s award of fair value at 7.8% below the merger price. The authors observe that SWS is the first Delaware Supreme Court decision “in the era of ‘appraisal arbitrage’ to affirm an appraised valuation meaningfully below the deal price.” For more on SWS, see our coverage here .
As reported by Pensions & Investments, the Arkansas Teachers Retirement System has committed $30 million to an alternative asset manager specializing in appraisal opportunities. Further highlighting the focus on appraisal, the Fund committed an additional $30 million to a different fund, but agreed to expand that fund to include appraisal.
As we’ve blogged about before, appraisal can be both a critical investor protection and a viable way for investors to increase returns in M&A deals. The past several years have seen more institutional investors getting involved in appraisal – something some have suggested is part of the duties they have to their beneficiaries.
The Harvard Business Law Review has published “The High Cost of Fewer Appraisal Claims in 2017: Premia Down, Agency Costs Up” an article we’ve blogged about previously, including commentary from interested authors. The HBLR piece, by Matthew Schoenfeld, argues that weakened shareholder litigation reduces the acquisition premium in mergers. This is another contribution to the growing body of work connecting appraisal – and other litigation remedies – to protection of shareholder rights and value.
A copy of the HBLR article is available here.
Seekingalpha has published this piece, “Appraisal Rights: Nontraditional Shareholder Activism” by Aberdeen Asset Management. In this post, Aberdeen recounts the increase in appraisal in this decade, and focuses on how investors have sought to realize additional returns in the appraisal process. Aberdeen then highlights the risks, including legislative risks (which we have covered before) in noting that appraisal is “as much of a legal strategy as it is an investment strategy” and in noting that proper appraisal experience is important to evaluating any appraisal opportunities.
Lexology’s Federal Securities Law Blog has this analysis of the recent article we posted about, the High Cost of Fewer Appraisal Claims. The author, from Porter Wright in Ohio, notes that the recent data on appraisal claims dispel certain arguments made by the anti-appraisal crowd. In particular, he writes, “Prior to the 2016 amendments, many proponents of limiting appraisal rights argued that shareholders who invoke their appraisal rights negatively affect non-dissenting shareholders; their thought being that buyers in transactions routinely withhold giving their highest, top-dollar bid due to the risk that some of the buyer’s money will have to be used later to defend against appraisal litigation . . . [but], if this theory was true, then deal premiums would have increased after the 2016 amendments.” The recent research suggests this may not be the case.
The analysis concludes with an appeal to states outside Delaware considering appraisal legislation or that have appraisal laws: “Regardless of sophisticated investors using the appraisal arbitrage strategy, perhaps having expansive appraisal rights actually benefits target shareholders in the long run? Due to the study’s findings, it might be best if other states take a wait-and-see approach to better understand the impact of Delaware’s amendments before they follow suit.”
The Harvard Law School Forum on Corporate Governance and Financial Regulation posted yesterday on Merger Negotiations in the Shadow Judicial Appraisal. In this post, Professors Brian Broughman, Audra Boone, and Antonio Macias address the explosion in merger litigation over the past decade and present their empirical study testing the competing explanations of the ex-ante effect of appraisal litigation on M&A activity. As reported in their study, their evidence implies that “appraisal remedies afford important protection for minority shareholders” during their sample period.
Professors Korsmo and Myers, whom we have blogged about before, have a new post on CLS Blue Sky Blog, titled “A Reality Check on the Appeals of the DFC Global Appraisal Case.” The Professors argue that the DFC Global appeal, which we’ve been covering, presents an attempt by deal advisors “to alter Delaware’s appraisal jurisprudence[,]” seeking to “undermine appraisal rights and shield opportunistic transactions from judicial scrutiny.” Urging the Supreme Court not to “tie the Court of Chancery’s hands in future cases” – the Professors cite recent research showing that appraisal petitions are “more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism.”
The Harvard Law School Forum on Corporate Governance and Financial Regulation recently carried a post by Theodore Mirvis of Wachtell Lipton, “Delaware Appraisal at a Crossroads?” This HLS Forum post discusses the recent DFC argument – which we’ve posted about – and lays out a variety of thoughts on future questions in appraisal and appraisal arbitrage. For more on DFC, see our coverage here.
The Delaware Chancery Court just issued two significant appraisal rulings, the PetSmart opinion on Friday — awarding petitioners the merger price — and the SWS Group decision on Monday, which actually awarded stockholders less than the merger price. We will post separately about our observations on these rulings.
In the meantime, one immediate reaction is that these decisions might factor into the Supreme Court’s approach to the DFC Global appeal and the upcoming argument in that case on June 7, as the trial judges have again proven that they are ready and willing to peg their fair value award at — or even below — the merger price, without a mandatory Supreme Court rule that might require a merger-price determination result if the sale process proved to be sufficiently robust.