The Harvard Law School Forum just put out this piece on appraisal, wherein attorneys from Debevoise & Plimpton discuss the current state of Delaware appraisal jurisprudence and seek to place the key recent decisions in the context of the overall arc of appraisal law.  The attorneys close with this observation:

So where does this leave us? First, we are meant to put significant trust in efficient market theory, relying as a starting point on both market price and, if resulting from a strong process, deal price. Second, we need some additional guidance on what will or will not jeopardize initial reliance on deal price. And third, we still need a fair amount of guidance on what, if anything, to subtract from deal price in a sponsor deal, on what to subtract from deal price in a strategic deal, and on what, if anything, to add to market price in either type of deal.

If a company structures a merger to avoid appraisal rights, does a shareholder have no recourse?  That question will no doubt be part of the debate as City of North Miami Beach v. Dr. Pepper Snapple Group, Inc. is litigated.  In a complaint filed in Delaware Chancery court on March 28, 2018, plaintiffs, a putative class of investors in Dr. Pepper, allege that the Dr. Pepper board has created a merger structure meant to frustrate their appraisal rights and that the merger will ultimately undervalue their shares. Describing the merger structure as one “only a contortionist can appreciate,” the plaintiffs seek to enjoin the merger, announced January 29, 2018, between Dr. Pepper and Keurig, among other remedies [$$].

According to the complaint, the ‘merger’ at issue has been structured as an amendment to Dr. Pepper’s charter, which would multiply the number of Dr. Pepper shares by seven. The shares would be issued to Keurig shareholders, the result being that post-merger/not-merger, Keurig shareholders would own about 87% of Dr. Pepper – a de facto merger, according to the complaint.  In economic effect, Keurig will purchase ‘new’ Dr. Pepper shares (as a result of the total share count being multiplied by seven) and thereby receive a supermajority of total company shares, rather than purchasing 87% of Dr. Pepper on the market or via a tender offer.

How are appraisal rights involved?  The consideration for the share issuance takes the form of a onetime cash dividend for $103.75 per share to pre-amendment shareholders.  Normally, if this were a classic merger, such a deal would be subject to appraisal rights under DGCL §262 – a cash merger has appraisal rights attached.  But the unique Dr. Pepper structure would not provide for appraisal rights – because the stockholders are just approving an amendment, so the theory goes, they are not actually engaged in a merger.

The plaintiff in Dr. Pepper pleads that appraisal rights are meaningful and important to investors, writing “The availability of appraisal provides an important protection for all investors, including small investors who could not otherwise bear the expense and burden of pursuing appraisal actions on their own. This is because the assertion of appraisal rights by the investors who can justify the investment provides a deterrent to corporate misconduct and incentivizes fair pricing.”

This is the fourth lawsuit challenging the Dr. Pepper merger, but one of the relatively rare lawsuits that focus on appraisal rights and their availability in a merger (or not-merger, as the case may be).  We will follow developments in this action.

In this article, Fried Frank LLP attorneys discuss the three appraisal decisions since the Delaware Supreme Court’s decision in Dell Aruba, AOL and SWS. The article notes that while the Supreme Court in Dell directed the Chancery Court to consider the deal price and accord it appropriate weight, these three decisions assigned no weight to the deal price in setting fair value below the deal price.  Given the inconsistency with Dell, the authors suggest that other Chancery cases may not follow the same approach.  Taking a more future-orientation, the authors also predict that appraisal results below the deal price will continue in arms-length mergers without a seriously flawed sales process, but may be above or even significantly above the deal price if the process is seriously flawed.  These predictions have become more common, as authors and academics looking at appraisal have increasingly come to suggest that Dell (and its progeny to come) may be moving appraisal more towards the realm of fiduciary duty litigation than before.

Gregory V. Varallo of Richards Layton & Finger, P.A. discusses takeaways from the “The Continuing Impact of Appraisal Rights” panel at the 30th annual Tulane Corporate Institute. At the two-day series of panels on Delaware corporate law and M&A deal making, which took place on March 15-16 in New Orleans, appraisal rights remained a hot topic.

The Harvard Law School Forum on Corporate Governance and Financial Regulation recently posted an analysis by Wachtell, Lipton, Rosen & Katz of the Delaware Supreme Court’s recent decision in SWS, summarily affirming the Delaware Chancery Court’s award of fair value at 7.8% below the merger price.  The authors observe that SWS is the first Delaware Supreme Court decision “in the era of ‘appraisal arbitrage’ to affirm an appraised valuation meaningfully below the deal price.”  For more on SWS, see our coverage here .

The Harvard Law School Forum on Corporate Governance and Financial Regulation has published a post by authors Professor Yair Listokin and Mr. Inho Andrew Mun, regarding corporate law in a financial crisis. Reviewing the crisis in 2008 and the rescue mergers that occurred, the authors propose that during a financial crisis, corporate law changes–in particular with respect to mergers. By replacing voting rights with appraisal rights, the authors propose that the efficiency gains pre-merger, whereby crisis actors would be able to move with more alacrity and fewer technical issue holdups, would be balanced by the protection of shareholder rights post-merger: by appraisal.

The authors certainly hit upon a basic reality: Appraisal rights remain a viable protection for shareholder interests and rights, and are one of the few post-merger remedies that exist. The authors’ idea to apply what would effectively be “super-appraisal” in a crisis–collapsing pre-merger remedies into the post-merger appraisal remedy–is certainly an innovative suggestion.

The article is available here.

We’ve written before about the SWS appraisal case, decided in mid  2017. After the ruling, petitioners appealed to the Delaware Supreme Court. On Wednesday, February 21, the Delaware Supreme Court held oral argument (which you can watch on this site). Part of the argument focused on the concept of size premium – a primer on which is available here – and which is being contested in the SWS appeal.  For more on the SWS oral argument, see Law360 [$$$].

On Dec. 14, 2017, the Delaware Supreme Court handed down the Dell decision. We covered the decision previously.

In the month that has followed, coverage of the Dell decision has been intense. Numerous news outlets, blogs, corporate governance authors, and law firms have provided their own take on the Dell decision. We have collected some of that commentary, with illustrative quotations reflecting the breadth of that coverage, as follows.

Appraisal is the New Fiduciary Duty, Business Law Prof Blog. “The substitution of appraisal litigation for fiduciary litigation is near complete: improving upon deal price in the context of appraisal may be impossible unless something went wrong in the sales process (at least for the sale of a public company without a controlling stockholder).”

Appraisal Apprisal: Dell v. Magnetar, Eric Talley & Jeffrey Gordon, CLS Blue Sky Blog.After Dell, one can safely assume that courts will focus even more intently on whether the merger price emerged from a robust and value-maximizing deal process.”

Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies; Lawrence Hamermesh and Michael L. Wachter, HLS Forum on Corporate Governance and Financial Regulation. “Facilitated largely by ‘appraisal arbitrage’ — the practice of purchasing shares of stock after announcement of a merger, with a view to exercising the statutory right to an award of ‘fair value’ in lieu of the merger price — the once-discredited appraisal remedy has become a significant phenomenon in shareholder litigation.”

Guest Post: From Corwin to Dell: Implications for Investors and Corporate Acquirers, the D&O Diary. “In sum, the arc of Delaware law from Corwin to Dell may result in under-enforcement of fiduciary duties through representative litigation, and may unintentionally entice increasingly aggressive breaches of fiduciary duties.”

In re Appraisal of Dell Inc.: The Continuing Relevance of Deal Price in Delaware Appraisal Proceedings, Business Law Today. “Dell does, however, indicate that MBO transactions will be subject to more rigorous scrutiny in the context of appraisal proceedings and, given certain inherent realities, may be less likely to be found to have produced a price equal to fair value. Even so, Dell does not foreclose a finding that the deal price in an MBO transaction equals fair value.”

Implications of the Recent Dell Appraisal Decision, Paul Weiss. “To reduce the risk of a large appraisal award, target boards may wish to make a record of their focus on the company’s intrinsic value, as opposed to the premium to market represented by the transaction price.”

Delaware Supreme Court Reverses And Remands Dell MBO Appraisal Decision, Finding The Trial Court Erroneously Disregarded The Deal Price, Shearman & Sterling.The Court thus reversed and remanded with instructions to give such weight to the deal price, and explain the weight given to each factor considered, or — at the Court of Chancery’s discretion — to enter judgment at the deal price without further proceedings.”

Dell Ruling Bridges Philosophical Gap In Del. Appraisal Law, Law360 [$$]. “You can’t look at the Dell opinion and say the court was going to take just any old deal,” Hamermesh said. “It was a — show me your process is reasonable. There may be almost a presumption, but it’s rebuttable.”

Appraisal Litigation Update, Cadwalader, HLS Forum on Corporate Governance and Financial Regulation.A Well-Executed Sales Process is Instrumental in Determining the Weight to be Ascribed to Deal Price in an Appraisal Analysis.”

Delaware Supreme Court Reaffirms Importance of Deal Price in Dell Appraisal Reversal, White & Case. “To prevent creating a bright-line rule, the Supreme Court was careful to note that it was not holding that ‘the market is always the best indicator of value, or that it should always be granted some weight.’ Rather, the Supreme Court noted that the record contained compelling evidence reflecting ‘market efficiency, fair play, low barriers to entry, outreach to all logical buyers, and the chance for any topping bidder to have the support of Mr. Dell’s own votes … .’”

Delaware Supreme Court Further Clarifies Appraisal Principles Applicable to Public Company Buy-Outs, Clifford Chance.[Dell], and the Court’s earlier DFC decision, have reshaped the law governing exercises of statutory appraisal rights in public company buy-outs.”

The Harvard Business Law Review has published “The High Cost of Fewer Appraisal Claims in 2017: Premia Down, Agency Costs Up” an article we’ve blogged about previously, including commentary from interested authors.  The HBLR piece, by Matthew Schoenfeld, argues that weakened shareholder litigation reduces the acquisition premium in mergers.  This is another contribution to the growing body of work connecting appraisal – and other litigation remedies – to protection of shareholder rights and value.

A copy of the HBLR article is available here.

The Delaware Supreme Court issued its highly-anticipated ruling today in the Dell appraisal case, reversing and remanding the trial court’s 28% premium awarded to the stockholders.  In sum, the court held that where a company is sold in a pristine M&A auction process, the chancery court must give the merger price “heavy weight” in its ruling, leaving it to the trial court to decide just how much weight that should be in this case.   The Supreme Court also ruled on a cross-appeal challenging how the trial court assessed expenses across the appraisal class.

For further coverage of the Dell decision, see the links below.

Appraisal Apprisal: Dell v. Magnetar, Eric Talley & Jeffrey Gordon, CLS Blue Sky Blog

Delaware Supreme Court Reverses And Remands Dell MBO Appraisal Decision, Finding The Trial Court Erroneously Disregarded The Deal Price, Shearman & Sterling

Dell Ruling Bridges Philosophical Gap In Del. Appraisal Law, Law360 [$$]

Appraisal Litigation Update, Cadwalader, HLS Forum on Corporate Governance and Financial Regulation

Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies, Lawrence Hamermesh & Michael L. Wachter, HLS Forum on Corporate Governance and Financial Regulation

Delaware Supreme Court Reaffirms Importance of Deal Price in Dell Appraisal Reversal, White & Case

Delaware Supreme Court Further Clarifies Appraisal Principles Applicable To Public Company Buy-Outs, Clifford Chance

**This firm is a counsel of record in the Dell case.