Does appraisal arbitrage create costly uncertainty for a putative corporate buyer?  In The Cost of Appraisal Rights: How to Restore Certainty in Delaware Mergers, 52 Ga. L. Rev. 651 (Winter 2018), the author argues that the well-established ability to alienate voting interest from equity interest with common stock opened the door to appraisal arbitrage – and that either a legislative, or a market plumbing solution, could ameliorate corporate buyers risks when entering into a merger.  We’ve covered before how deal lawyers and others must factor in the possibility of appraisal when looking at a transaction (perhaps even more so when a transaction involves insiders, has a poor process, or otherwise does not comply with shareholder-protective standards) – here, the author proposes solutions.

First, a legislative change to the appraisal holding requirement is proposed: require appraisal seeking shares to be continuously held from the record date.  Second, structurally, move the securities recording system from one of fungible bulk to actual share tracing through a system of centralized recording.  (Note: We’ve written before about how blockchain solutions, which can be centralized or decentralized, could affect appraisal).

To briefly recap and oversimplify what these changes seek to ‘solve’:  The vast majority of stock in the United States is held in “fungible bulk” by the Deposit Trust Clearing Corporation (DTCC).  Fungible bulk means that one share cannot be differentiated from another share.  If a company issued 1,000 shares of stock – any given one of those thousands shares is ‘fungible’ with any other given share – and they are held by DTCC in ‘bulk’ – meaning not assigned to a specific (even individual) beneficial owner, but rather in bulk lots assigned to certain nominees, brokers, etc.

Setting aside the wisdom (or lack thereof) of this system, the result is that it is a metaphysical impossibility, generally, to show that any particular share of stock voted for or against a merger (or abstained).  The result is that a share purchased after the record date may well be one of the (again, this is metaphysical – the shares cannot be differentiated) shares that voted against the merger (or abstained), and thus, it carries appraisal rights.  This becomes an issue only if more shares seek appraisal than could have possibly voted against the merger or abstained.

The author’s changes here would certainly restrict appraisal arbitrage; as we’ve discussed before, structural solutions that allow for actual share tracing could make for all kinds of changes to corporate governance and shareholder rights (including appraisal).  Delaware courts — as well as the legislature — have rejected efforts to import a share-tracing requirement in Delaware appraisal.

The possible impact of blockchain based shareholder governance, including shareholder voting, has been a hot topic in recent years. We’ve covered a number of potential intersections between blockchain and corporate governance (including appraisal) before. Professor Christopher Brunor of the University of Georgia reviews a recent scholarly proposal for blockchain based shareholder governance in this recent piece. While appraisal changes represent only a small portion of the possible changes blockchain based governance could bring, it also is an area where the fault lines between the old – fungible bulk – system appear and are perhaps most likely to be litigated. Pre-blockchain governance cases dealing with fungible bulk may have little application in a post-blockchain governance world; but that also depends on what kind of blockchain governance structure one adopts. In other words, appraisal is a likely place where blockchain governance will face litigation that affirms (or negates) the underlying premises of much of this scholarly attention.

The Harvard Business Law Review (whose articles we’ve covered before) has published a piece concerning Delaware allowing blockchain to be used for company stock ledgers. While we have written about blockchain repeatedly, the new HBLR article examines how blockchain-based securities could fundamentally change corporate governance. Using Dell and Dole as examples, the author discusses how blockchain can solve delayed settlement and unrecorded transfers issues – issues that can be critical when it comes to determining the entitlement to appraise.

The author notes that blockchain implementation may create value for the economy as a whole but would not necessarily distribute the gains evenly. This issue–effectively a tragedy of the commons–could be resolved through government action. But markets may also play a role. As readers of this blog know, the majority of large U.S. companies are incorporated in Delaware, a state with less than 1 percent of the U.S. population. Part of the reason for that is a market for legal rules–Delaware law, and the Delaware courts, are a more hospitable environment for incorporation than other places. Likewise with blockchain. If early adopters find distributed ledgers result in lower transaction costs – and thus additional investors, more liquidity, easier (and cheaper governance) or similar – this may encourage regulatory reform in states looking to compete with Delaware.  Regulatory reform may, in turn, beget further adopters.

We expect continuing developments with blockchain, and its use with securities, in the future.


In light of blockchain stock ledgers coming to Delaware, commentators and news outlets are starting to take notice. Recently, Bloomberg has covered the idea of stock ledger blockchain, as has the Financial Times [$$]. The core difference between any possible blockchain stock ledger and the existing system would be the likely elimination of the concept of fungible bulk. A blockchain, or at least some iterations of a blockchain, would allow a diligent researcher to potentially trace a “share” (or whatever one unit may be called) through each transaction, each wallet, or each address, back to issuance/mining/founding. This may not necessarily be an easy process–but as it stands currently, such a process is truly impossible. The “shares” held by, for example, a prime broker, are non-differentiated (hence the idea of fungible); they are not individual “units.” Blockchain share ledgers would have implications for “naked” short selling, corporate governance, securities litigation, derivative actions, and, relevant here, appraisal. As reporters are observing, blockchain may also reduce transaction costs associated with M&A activity. This remains a development likely to generate continued interest going forward.

As we have previously covered, Delaware has been considering whether to allow Delaware corporations (with Delaware being the site of the vast majority of appraisal litigation) to use blockchain platforms to issue and trade shares.  As of July 21, that has become the law with Delaware’s governor signing a bill allowing blockchain to be used for the maintenance of corporate records, including stock ledgers.  Blockchain is a concept of distributed ledger, as opposed to the centralized ledger system of DTCC.  From JD Supra: “One practical reason for using blockchain technology to track the transfer of corporate securities stems from a long-standing uncertainty surrounding the property rights of investors who ‘ultimately have no identifiable relationship with the corporate issuers of investment securities’ that they purportedly hold.”

Continue Reading Delaware Gov. Signs Blockchain Bill – Possible Impact on Appraisal