Appraisal rights can offer investors critical protections against corporate actions that do not provide shareholders fair value. Investors often recognize this – as we recently posted, proxy voting guidelines suggest investors vote in favor of appraisal. And then there are the Corporate Governance Principles [.pdf] of the Los Angeles County Employees Retirement Association (LACERA), which list appraisal rights as one of the corporate structures that LACERA finds important in companies it invest in, writing “Appraisal Rights: Investors should be afforded appraisal rights by which they may seek a judicial review of the terms of certain corporate transactions in order to determine fair market value.”
The Taft-Hartley Proxy Voting Guidelines for 2019 have been released by Institutional Shareholder Services. The guidelines, which many institutional investors follow, suggest that shareholders vote “for proposals to restore or provide shareholders with the right of appraisal.” As we’ve covered before, there is meaningful academic work tying the existence of, and exercise of appraisal rights, to increased value for shareholders, and that is in line with the proxy guidelines suggestion.
Seven years ago this week, in Roam-Tel Partners v. AT&T Mobility, C.A. 5745-VCS (Del. Ch. Dec. 17, 2010), then-Vice Chancellor Strine held that in a short-form merger, a stockholder can revoke its prior waiver of its appraisal rights within the twenty-day statutory election period, absent any prejudice to the corporation. In that case, the stockholder submitted to the company a letter of transmittal along with his stock certificates, but then changed his mind, returning their (uncashed) check and timely demanding appraisal. The court compared his initial decision in accepting the merger consideration to that of submitting a proxy in a long-form merger, which is freely revocable at any time prior to the shareholder vote.
In such transactions, shareholders are thus permitted to reverse their tender and opt instead to appraise so long as they do not actually accept the merger consideration and submit a timely appraisal demand within the statutory period.
Cooley LLP highlights that increased appraisals are being factored into mergers. Following up on a previous piece, Cooley LLP notes that appraisal costs can be large, referencing the over $50 million added to the merger price in Dell, and further comments on the rise of appraisal claims, which Cooley calculates as a 267% increase from 2012 to 2016. We’ve posted previously on the uptick in appraisal filings, and how the August 2016 amendments may further increase filings, as well as what this means for investors interested in the strategy.
The Vanderbilt Law Review published this note on Vice Chancellor Laster’s disqualification of stockholders in Dell who had inadvertently voted in favor of the merger, about which ruling we’ve posted before. This note breaks down that ruling and discusses the court’s strict requirements for appraisal procedure and its affirmation that share-tracing is not required of appraisal petitioners.
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.
On May 11, Vice Chancellor Laster issued an opinion in the Dell case denying the T. Rowe Price lead petitioner’s entitlement to proceed with its appraisal case on the grounds that it (inadvertently) voted in favor of the merger, when it should have abstained or voted against. The ruling did not address the underlying valuation issue, which is still outstanding.
The highlights of this ruling:
- The record evidence shows that T. Rowe instructed Cede via its custodian to vote in favor of the merger; the arguments that those instructions were mistaken and unintended are irrelevant.
- The Transkaryotic, BMC Software and com line of cases allowing appraisal arbitrage is irrelevant, as those cases involved an absence of proof regarding how the petitioners’ shares were voted; here there is record evidence of how those shares voted. It is not enough to rely on Cede having generally voted enough shares against the merger as was true in the Transkaryotic cases. To read more from previous posts on this topic, click here and here.
- Also irrelevant was the apparent confusion caused by the proxy statement that was issued after the shareholder meeting was rescheduled, telling shareholders that that there was no need to re-vote if they had previously voted (and here, T. Rowe had previously voted “Against”).
- The court was unapologetic and unequivocal in reaching this decision. This is unlike the court’s July 2015 opinion which dismissed approximately 1 million petitioning shares based on the violation of the continuous holder requirement, in which the chancery court so much as asked the Supreme Court to reverse that decision. That decision arose from certain petitioners’ custodians having directed Cede to re-certificate the shares in the names of their own nominees rather than that of Cede.
- Rowe was given the merger price, without interest (the merger closed in October 2013).