Delaware law firm Morris James has put out a list of the “Top Ten” 2018 developments in Delaware corporate law, and lists two appraisal cases, Aruba, and Dr. Pepper as #10 and #1, respectively. As with many 2018 appraisal retrospectives, Morris James sees further developments still to come in 2019, in particular important appeals to the Delaware Supreme Court and further clarification of some key holdings from the past couple years.
In the wake of the Dr Pepper decision that a reverse triangular merger does not carry appraisal rights and considering corporate counsel’s growing concern over appraisal petitions, one might wonder whether we will see a rush of reverse triangular mergers in order to try and thwart investor’s appraisal rights. Lawyers from Fried Frank say no in this Law360 piece [$$$]. At its core, the authors focus on the Chancery Court’s own, footnoted view that a rush to reverse triangular mergers is an “overstated” risk, because the structure has been known and employed before. The authors agree that there will not be a move toward this contorted merger structure (with a major caveat, covered below), writing this:
In our view, it is unlikely that the structure would be broadly used solely for the purpose of avoiding appraisal rights. We note that the structure involves the disadvantages of complexity (making it potentially impractical in any competitive bidding situation) and leaving an equity stub in the hands of the target public stockholders (a result that acquirers typically disfavor). Moreover, generally, with an exception possibly in the case of conflicted controller transactions, it would be inadvisable to structure a transaction based primarily on avoiding appraisal rights–given that appraisal claims are made only in a relatively low (and recently declining) percentage of transactions, that appraisal awards significantly above the deal price are made only rarely (recently, even more rarely), and that appraisal awards at (or even below) the deal price have been increasingly prevalent recently.
This is a notable analysis. The authors contend that the structure may be impractical when there are competitive bids (i.e., when appraisal is not particularly favored to begin with) and then draw an exception for conflicted-controller transactions (when appraisal would be favored because of issues with the deal process. Put another way, the reverse triangular merger structure may not be used when appraisal isn’t viewed as much of a threat to begin with. But does Dr Pepper open the door to using this anti-appraisal structure in the exact kind of deal where a significant appraisal uplift is possible, such as conflicted-controller transactions? The authors seem to acknowledge as much.
As appraisal risk continues to be meaningful in conflicted-controller transactions, the Dr Pepper structure might be attractive in these situations if the controller is prepared to leave some of the equity of the target company with the sellers. We note that the public equity stub could be eliminated through a reverse stock split following completion of the merger; however, there would be an issue whether that additional step might (1) convince the court to view the structure as an impermissible contrivance to avoid appraisal (thus leading to a different result than in Dr Pepper) and/or (2) raise fiduciary issues and affect the court’s review of the transaction under the “entire fairness” standard. … There are other, less complex structures that could be considered and that could render appraisal rights inapplicable, although, of course, any novel structure could raise business and practical issues and prompt legal challenges.
Like with the appraisal amendments and differing predictions of how those would affect appraisal filings, the impact of Dr Pepper on choice of deal structure remains to be seen.