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.”
The Review of Securities & Commodities Regulation recently published “The Shift in Delaware Appraisal Litigation” (full article $$$), suggesting, as have other authors, that Delaware appraisal has moved to a realm where process questions are central to the appraisal analysis. This will be little surprise to readers of this blog; while appraisal is distinct from fiduciary claims, recent cases have focused increasingly on a search for process issues, and the absence of issues with the sales process has led some Delaware Chancellors to conclude that merger price (or other price) is the proper measure barring such process issues. Whether that will continue as the caselaw develops in 2018 is yet to be seen; and as Court’s clarify what can be problematic about a process we may well see decisions giving greater clarity to where one can expect the “shift” to take us.
Probably – at least according to this analysis posted on the Harvard Corporate Governance Forum. The analysis provides extensive discussion of Norcraft and Solera**, two recent decisions we’ve also noted.
The authors conclusion will be familiar to regular readers of this blog: “appraisal decisions likely will continue to focus on many of the same issues that courts examine when considering breach of fiduciary duty claims in the merger context as well as assessing whether the seller’s stock trades in an efficient market.” As other authors have suggested, sales process and market efficiency may be the new focus of appraisal proceedings – seemingly a litigation crossover from fiduciary duty litigation (as to process) and fraud litigation (market efficiency).
** This firm is counsel of record to petitioners in the Solera matter.
Earlier this year, a Florida appeals court adopted the Trulia decision from Delaware – In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016) being a key Delaware case regarding the approval of merger related class action settlements. Before Trulia, class actions challenging mergers could (and often did) resolve via something called a “disclosure only settlement” – that is, the target company resolved the class action by making additional disclosures related to the deal but did not enhance the cash value consideration to stockholders. Trulia presented a new reality that such settlements would not be approved. Many commentators saw this as a serious blow to class actions challenging mergers (the major form of pre-closing merger challenge).
As the authors of the linked article observe, post-Trulia, appraisal claims increased. While the linked article does not deal with the reason Trulia may be linked to increased appraisal, readers of this blog may see the connection immediately. Appraisal actions can be driven, in part, by a lack of information (or an asymmetry of information) between the target/acquirer and shareholders. Pre-Trulia, pre-closing class actions were more common; even if they did not result in increased consideration, the extra disclosures could provide additional information to the marketplace. And, for shareholders considering appraisal, an indicia whether pre-closing discovery yielded a ‘smoking gun’ – or additional information that showed the merger undervalued the target. The settlement also acted as a ‘bought release’ – releasing the breach of fiduciary claims (pre-closing!) for the class. But post-Trulia, as such cases have seen diminished use, shareholders are left with less information, classwide pre-closing releases are less prevalent, and thus post-closing remedies gain in importance: hence, appraisal.
Will Florida see an uptick in appraisal now that a Florida appeals courts has adopted Trulia? One would think it likely.
Does D&O insurance cover appraisal? Last year we discussed this topic – and now Solera Holdings** has sued its D&O insurance providers alleging that they have refused coverage for the costs of the appraisal action as well as the interest Solera owes.
Here again we see an appraisal proceeding resulting in further litigation after the fact – here an insurance action, to go with the securities fraud actions we’ve seen before and breach of fiduciary duty litigation as well.
** This firm is counsel of record to petitioners in the Solera matter.
On April 23, 2018, the Delaware Supreme Court affirmed last July’s Chancery court ruling in the Clearwire case. This decision ends the appeal by Clearwire shareholders looking to overturn the lower court decision finding that Clearwire was worth $2.13 per share, below the $5 merger price. When the Supreme Court, or any appellate court, affirms without discussion or opinion, it provides little guidance for litigants going forward. Here, Clearwire had unique facts – covered in our original post – that set it apart from many other appraisal cases.
On Monday, Law360 [$$] reported that the stockholders in the Clearwire appraisal action filed their opening brief in support of their appeal of the Chancery Court’s ruling, which found the fair value of Clearwire Corp. to be $2.13 per share, well below the $5 per share deal price paid by Sprint Nextel Corp. As reported in the article, on appeal, the stockholders argue that the “staggering discount” awarded by the Chancery Court is “virtually unprecedented.” We have previously posted on the Chancery decision here. We will continue to monitor the appeal and post on new developments as they arise.
As reported today in Law360 [$$], the Delaware Supreme Court heard argument yesterday on the chancery court’s ruling in the Dell appraisal case. The court did not render its decision and did not indicate when it would do so. We’ll continue to monitor the docket and post when the ruling comes down.
** Note: this law firm is one of the counsel of record in the Dell case.
As we previously posted, the Chancery Court appraised the fair value of Clearwire Corp. to be $2.13 per share, substantially below the $5 per share merger price paid by Sprint Nextel Corp in July 2013. This post will provide a more detailed breakdown of the ruling and the bases for Vice Chancellor Laster’s opinion.
In a March 2016 working paper, Corporate Darwinism: Disciplining Managers in a World With Weak Shareholder Litigation, Professors James D. Cox and Randall S. Thomas detail several recent legislative and judicial actions that potentially restrict the efficacy of shareholder acquisition-oriented class actions to control corporate managerial agency costs. The authors then discuss new corporate governance mechanisms that have naturally developed as alternative means to address managerial agency costs. One of these emerging mechanisms possibly as a response to judicial and legislative restrictions on shareholder litigation, is the appraisal proceeding. As readers of this blog are well aware, the resurgence of appraisal proceedings has also been fueled by the practice of appraisal arbitrage.
Does the resurgence of appraisal litigation provide an indirect check on corporate managerial or insider abuse? Professors Cox and Thomas are skeptical, citing several factors that may limit an expansion of appraisal litigation beyond its traditional role. However, they acknowledge that there are circumstances where appraisal litigation can potentially fill the managerial agency cost control void that other receding forms of shareholder litigation have created.
As the paper argues, at first glance, appraisal litigation appears to be a powerful tool for investors to monitor corporate management and control managerial agency costs. However, shareholders face certain disadvantages in an appraisal proceeding, including the completion of required, difficult procedural steps that must be followed precisely to maintain appraisal rights (highlighted by the recent Dell decision); the lack of a class action procedure that would allow joinder of all dissenting shareholders in order to more easily share litigation costs; and the narrow limits of appraisal as purely a valuation exercise that does not take aim at corporate misconduct.
After identifying these general obstacles to appraisal, the authors discuss more specific factors that arguably limit the efficacy of appraisal for remedying management abuse in all M&A transactions. Thus, appraisal is available as a remedy only in certain transactions (e.g., the market-out exception), and even among those transactions that qualify for appraisal, initiating appraisal litigation may often not be cost effective, especially for small shareholders. Also, deals can be structured to minimize or even avoid appraisal altogether.
Cox and Thomas also highlight circumstances where appraisal may well serve as a check on management power. First, appraisal can protect shareholders from being shortchanged in control shareholder squeezeouts. Because these transactions are not subject to a market check, appraisal gives shareholders a tool to ensure that the merger price reflects the fair value of the acquired shares. Leveraged buyouts that do not undergo market checks may also raise conflict of interest concerns, especially when the target’s executives may seek to keep their jobs and be hired by a private equity buyer to run the firm. In this scenario, appraisal arbitrage may ensure shareholders are not shortchanged in a sale of control. Shareholders facing these circumstances may benefit from appraisal.
Second, appraisal arbitrage, as repeatedly covered by this blog, is a viable appraisal tactic. As we’ve previously discussed, appraisal arbitrage has been facilitated by the Delaware Chancery Court decision of In re Appraisal Transkaryotic Therapies Inc., which held that shareholders who purchased their stock in the target company after the stockholders’ meeting, but before the stockholder vote, could seek appraisal despite not having the right to vote those shares at the meeting.
In their 2015 article Appraisal Arbitrage and the Future of Public Company M&A, Professors Korsmo and Myers argued that a robust appraisal remedy could work as a socially beneficial back-end check on insider abuse in merger transactions, but the authors appear skeptical that appraisal can fill this role due to limitations discussed here. These authors don’t take a normative position on appraisal arbitrage but simply query its efficacy as a control on managerial agency costs.
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The Appraisal Rights Litigation Blog thanks Charles York, a student at the University of Pennsylvania Law School and summer law clerk for Lowenstein Sandler, for his contribution to this post.