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.
The Financial Times published this critical assessment [$$$] of the DFC Global ruling and of the appraisal arbitrage strategy more generally, observing that the pending DFC Global appeal frames the current debate about what role, if any, merger price should play in appraisal cases.
** The content of this post is contributed by Goodmans LLP of Toronto, Canada. We thank Sheldon Freeman of Goodmans for this contribution.
In Canada, as in the U.S., shareholders are becoming increasingly interested in the use of “appraisal arbitrage” strategies in the context of certain M&A transactions. While the circumstances and motivations for engaging in these strategies are quite similar on both sides of the border, there are numerous structural differences between Canadian and U.S. dissent and appraisal regimes that may affect the implementation of these strategies in Canada. Goodmans LLP, one of Canada’s leading business law firms, recently summarized these differences in “The Use of Appraisal Arbitrage Strategies in Canada in Light of Dell” and points out the key legal issues to consider when engaging in or defending against an exercise of dissent rights.
In response to the article on appraisal arbitrage by Gaurav Jetley and Xinyu Ji of the Analysis Group, about which we’ve posted before, Villanova Law Professor Richard A. Booth now argues in The Real Problem With Appraisal Arbitrage [via Social Science Research Network] that Jetley and Ji’s charge against the Delaware courts for overly indulging appraisal arbitrage is misdirected. According to Professor Booth, while Jetley and Ji believe that the Delaware courts incentivize arbitrageurs by using a discount rate lower than the rate typically applied by investment bankers, Professor Booth argues that the bigger and more significant problem is that the Delaware courts additionally reduce the discount rate in the terminal period. Nevertheless, after identifying what he believes is the Delaware courts’ truly faulty practice, Professor Booth offers up a full-throated defense of the appraisal remedy in general and arbitrage in particular.
Some Highlights of the Article
- Professor Booth believes that Jetley and Ji’s criticism of the Delaware courts’ use of the so-called supply-side discount rate, rather than the historical rate of return, is overblown. He agrees that the supply-side rate can inflate a valuation, but not by as great a magnitude as Jetley and Ji seem to believe.
- In rebutting the argument that so-called arbs “are not themselves long-term common stock investors and should not be so compensated for the time value of their money,” he observes that “they have bought the stock they hold from legacy investors and thus should be entitled to the same package of rights enjoyed by such investors.” If arbs’ rights were to be curtailed, that would cause stockholders who choose to sell out suffering an even bigger discount, which in turn would raise the price of deals for acquirors, because target stockholders “will be less confident that they will be paid based on the agreed amount when they want to be paid.” In this respect, arbitrage actually serves the acquirors well.
- Professor Booth critiques the presumption of fairness that some Delaware cases have accorded to the deal price:
- First, the deal price may often be too low, as deal price sometimes depends on the percentage of shares bought. Thus, dissenting stockholders may well be entitled to “higher and higher prices as the public float gets smaller and smaller,” which he finds consistent with the policy objective underlying appraisal: to compensate stockholders for being forced to sell out at a time and/or price not of their own choosing.
- Second, Professor Booth cautions against according too much weight to the premium paid over market price, as a depressed stock price will naturally warrant a higher premium; in that case the premium is simply “compensation for a discount built into the market price.”
- Finally, it is inherent in the concept of nearly any acquisition that a buyer is only willing to pay some lesser price than full fair value, in order to extract the expected value to be gained by redeploying the target company to its highest and best use; to that extent, he suggests, “deal price should always be a bit lower than going concern value [emphasis added],” prompting stockholders to hold out.
- Given these factors, he finds that appraisal performs the valuable function of testing deal price against investor expectation based on CAPM. He believes that appraisal thus helps drive price toward fairness, as a robust appraisal remedy will induce bidders to pay a fair price up front. His critique of the court’s further reduction of the discount rate in the terminal period is intended to improve the appraisal process, not undermine it; he encourages the courts to embrace his reforms rather than “hide behind the aw-shucks notion that law-trained judges are ill-suited to address” questions of valuation, finance, and investment banking.
In summary, the author concludes that appraisal arbitrage has gotten a “bad rap” and that appraisal itself works best if arbitrage is made possible; he fears that absent arbitrage, buyers may rely on the hope that potential dissenters will simply decline to exercise any appraisal rights, allowing the bidder to get away with paying a reduced price.
Have the recent Delaware statutory amendments and major Dell decision threatened the appraisal arbitrage strategy? Business Law Prof Blog (via a guest post) acknowledges that while these two developments do not prevent appraisal arbitrage — indeed, the Delaware legislature rejected a proposal to crack down on arbitrage — they may be part of an overall trend against the strategy, and that those who want to pursue appraisal arbitrage should take action before potential other developments may limit it.
Appraisal arbitrage, as we’ve posted before, is a strategy whereby an investor buys shares of a company after announcement of a merger intending to exercise appraisal rights. Unlike historical holders, who may have purchased stock for amounts higher than the deal price, the arbitrageur is buying stock already priced with the deal in place, usually at a price much closer to the deal price. Whether the new Delaware rules will suppress appraisal filings has been a topic of significant debate – we’ve covered pieces about these topics before suggesting they may actually wind up inadvertently increasing appraisal claims.
The Business Law Prof Blog post points out that the fundamental premise of appraisal arbitrage involves the idea of “fungible bulk” – that any particular share of stock is part of the bulk of un-differentiable shares – so that barring a finding that the particular holder voted for the merger, the arbitrageur may seek appraisal so long as enough shares voted against the merger or abstained to “cover” the arbitrageur’s shares and render them eligible for appraisal.
Whether the recent statutory and legal developments actually signal a cautionary flag to arbitrageurs remains to be seen. The Delaware legislature will first need to be persuaded that its prior determination — that appraisal arbitrage is an accretive strategy that enhances shareholder value — was somehow incorrect.