In “Appraisal Arbitrage: In Case of Emergency, Break Glass” – a student note published in the Notre Dame Law Review (93 Notre Dame L. Rev. 2191) – the author lays out a case for why appraisal, including appraisal arbitrage, remains critical to the overall scheme of shareholder protection. As the author observes, many a critique of appraisal focus on the “who” of recent appraisal cases, focusing their attention on the appraisal arbitrage strategy and decrying that arbitrageurs (as opposed to, one must believe, long term shareholders who may not be as well positioned as arbitrageurs to pursue an appraisal case) are bringing appraisal cases at all. The student note points out that this focus on “who” has lost sight of “why” appraisal exists in the first place and what has been revealed by many of the appraisal cases of the past: many appraisal cases are meritorious in that they reveal (and result in) premia to below-fair-value merger prices. The author also highlights critical research on what the appraisal remedy does for even shareholders who don’t exercise it: brings up merger premiums. The note concludes with a worthy summation of why appraisal remains a valuable remedy in the shareholder arsenal: “appraisal still has value as a deterrence method and as protection for minority shareholders. Shareholders need a functioning emergency switch in the form of the appraisal remedy, and Delaware, whatever its next actions in this space, must tread carefully to preserve it as such.”
Professor Robert Reder and Vanderbilt JD candidate Blake Woodward have published a piece in the Vanderbilt Law Review En Banc reviewing the Delaware Supreme Court’s DFC decision and the intricacies of Chancellor Strine’s 85 page opinion. We’ve posted extensively about DFC throughout its history. The authors of the current piece point out that DFC can be partially read as a requirement for clearer explanations by the trial court of their reasoning with respect to valuation. The authors summarize DFC’s import when it comes to encouraging explanation by lower courts as: “when the Chancery Court is faced with a choice between the deal price and a discounted cash flow analysis as the basis for a fair value determination, a sliding metric balancing the quality of the sales process with the reliability of the projections utilized in the discounted cash flow analysis ought to be employed.”
This sliding mechanism – involving a review of the sales process that then feeds into how much weight the court gives the deal price – fits well with recent research that shows appraisal is “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” – i.e., the kind of cases where the ‘slide’ is against a reasonably fair process.
Authors from Potter Anderson write in the spring 2018 edition of Delaware Laws Governing Business Entities [$$] that recent developments in appraisal have restored ‘balance’ to the remedy. Citing case law where courts have deferred to deal price, amendments to the appraisal statute, and the statutory authorization of distributed ledger (i.e., blockchain) technology for corporations, the authors posit that some kind of ‘balance’ is being restored to what they propose was an otherwise unbalanced remedy.
History may not be so linear. Appraisal, as the authors acknowledge, has over a century of history in Delaware alone. The appraisal remedy was, for a long time, relatively unused. It has become far more utilized in recent years, and new developments, including technological change, may well alter the appraisal space in new and unforeseen ways going forward.
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.