As shown in a presentation to the Association of Corporate Counsel, despite predictions (and calls) for the death of appraisal, it remains prominent in discussions of M&A trends. In the May 10, 2018 presentation, attorneys from Cadwalader discuss their view of “Dell-Compliance” – noting a series of factors that would make a deal more likely or less likely to reflect fair value. For example (in this instance, using AOL as an example), a company that was approached by “other logical buyers” with a good merger process and without a prohibitive breakup fee is, according to the authors, more likely to be Dell-compliant than a deal where a buyer had an informational advantage, there was a no shop provision, and the existence of public statements by management all augured against Dell-compliance.
In its recent blog post, VentureCaseLaw covers a 2015 Delaware decision and how Delaware law deals with appraisal in instances where a Company has drag-along rights. In summary:
Venture-backed companies should not assume an implied waiver of minority appraisal rights in a merger that utilizes a voting agreement’s drag-along rights if procedural requirements are not followed. When a waiver of appraisal rights has procedural requirements, they need to be followed or eliminated via an amendment. Alternatively, the drag-along can require minority stockholders to explicitly approve the sale, instead of having the sale be de facto valid without their signatures given the drag-along.
CLS BlueSky Blog has published a post discussing the current state of Delaware appraisal law and fitting appraisal developments into the broader context of M&A rules and corporate governance. The post covers recent appraisal decisions, with the authors concluding that: “in our view, generally, the court is more likely to continue to reach above-the-deal-price results in non-arm’s-length merger cases (such as controller transactions, squeeze-outs, and certain MBOs-unless the transaction complies with the MFW prerequisites), and may also do so in arm’s-length merger cases involving a seriously flawed sale process.” This view fits with the trend of academics and attorneys focusing on both the sales process and then the valuation as part of appraisal. The authors also cover the 2018 proposed amendments, which we discussed here.
Professor Robert Reder and Vanderbilt JD candidate Blake Woodward have published a piece in the Vanderbilt Law Review En Banc reviewing the Delaware Supreme Court’s DFC decision and the intricacies of Chancellor Strine’s 85 page opinion. We’ve posted extensively about DFC throughout its history. The authors of the current piece point out that DFC can be partially read as a requirement for clearer explanations by the trial court of their reasoning with respect to valuation. The authors summarize DFC’s import when it comes to encouraging explanation by lower courts as: “when the Chancery Court is faced with a choice between the deal price and a discounted cash flow analysis as the basis for a fair value determination, a sliding metric balancing the quality of the sales process with the reliability of the projections utilized in the discounted cash flow analysis ought to be employed.”
This sliding mechanism – involving a review of the sales process that then feeds into how much weight the court gives the deal price – fits well with recent research that shows appraisal is “more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism” – i.e., the kind of cases where the ‘slide’ is against a reasonably fair process.
Authors from Potter Anderson write in the spring 2018 edition of Delaware Laws Governing Business Entities [$$] that recent developments in appraisal have restored ‘balance’ to the remedy. Citing case law where courts have deferred to deal price, amendments to the appraisal statute, and the statutory authorization of distributed ledger (i.e., blockchain) technology for corporations, the authors posit that some kind of ‘balance’ is being restored to what they propose was an otherwise unbalanced remedy.
History may not be so linear. Appraisal, as the authors acknowledge, has over a century of history in Delaware alone. The appraisal remedy was, for a long time, relatively unused. It has become far more utilized in recent years, and new developments, including technological change, may well alter the appraisal space in new and unforeseen ways going forward.
Last month, we saw authors calling appraisal a maze, and now, an analogy to a sculpture. In the journal M&A Law [$$], April 2018 edition, authors from Wilson Sonsini write about how recent Delaware cases have shaped and sculpted the appraisal remedy, but left open a number of issues for future decisions. Citing Aruba, AOL, DFC, and Dell, the authors conclude that deal synergies and market efficiency will take on increased importance and prominence in appraisal jurisprudence.
Whether appraisal is best described as a maze or sculpture, recent decisions have shown that the facts of each individual merger matter and that no one-size-fits-all rule applies.
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.
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.