Appraisal is a creature of statute, including in the Cayman Islands. Cayman appraisal has become a notable topic recently, with major decisions coming down from the Cayman courts and an uptick in investors using the appraisal remedy. Similarly, authors writing about Delaware have noted that quasi-appraisal is getting traction. Do the two have a meeting point?

The Cayman Financial Review provides an answer. Yes, the quasi-appraisal remedy exists in the Caymans; yes, much like in Delaware, it would require more than just an undervaluation of the company to access it–a violation of disclosure requirements, for example. As the authors note, a failure to provide sufficient disclosures frustrates shareholders’ ability to seek appraisal in the first place–leaving them with a post-merger quasi-appraisal remedy.

But the Cayman story does not end there; because of the somewhat unique way most Cayman companies involved in appraisal proceedings are structured, a Cayman quasi-appraisal case seems unlikely. This is because the kinds of Cayman companies at issue are usually held by shareholders who in turn hold ADS–American Depository Shares (or Securities). In other words, they are not actually shareholders of the Cayman company but instead hold an IOU security in the U.S. that can be converted to a Cayman registered security.

As the authors explain in more detail:

One potential impediment to obtaining either form of relief from a breach of the relevant duties however arises from the fact that the minority shareholders in these companies hold their interests in the form of ADSs. All such holdings must be converted into registered shares in the company before any entitlement to assert shareholder rights will be recognized by the Cayman courts, i.e. pending conversion, as a matter of Cayman Islands law, such persons are not actually considered shareholders of the company at all. This is likely to preclude most of the minority shareholders of the companies which have recently been taken private from pursuing any claim for quasi-appraisal relief, since it is unlikely that they will have converted their ADSs to registered shares without having intended to exercise dissent rights and pursue payment of fair value.

Compounding this is an enforcement issue. Unlike appraisal, where at least one still has the stock at issue, quasi-appraisal is a purely post-merger remedy. Again, the authors set out the problem. “If the quasi-appraisal action were to succeed, the shareholder might still encounter enforcement difficulties depending on the whereabouts of the individual defendants and the location of their assets, whereas judgment in an appraisal action would fall to be enforced against the Cayman company itself, assuming that the surviving entity is not foreign, if necessary, with further assistance from the Cayman courts.”

So, will we see quasi-appraisal cases in Cayman? These authors suggest there’s still a chance, but the hurdles are high, and the better course of action remains statutory appraisal.

Subject to the need to convert their ADSs to registered shares, where minority shareholders have been misinformed or misled into accepting a merger price which is well beneath fair value and giving up their rights to dissent, they may accordingly be able to obtain compensation from those responsible for their loss in a quasi-appraisal action. However, the considerably better course for a minority shareholder who is in any doubt as to the fairness of the merger price remains, again, subject to converting its ADSs to registered shares, to exercise its right to dissent from the merger and to demand to be paid fair value for its shares.

In Delaware, appraisal is a creature of statute. It is a statutory claim, born from 8 Del. Code Section 262; it is a claim in its own right, but it also carries with it statutory requirements. Appraisal requires that the right kind of demand be sent at the right time by the right entity. Quasi-appraisal is a creature of the common law and, as lawyers from Blank Rome observe in a growing concern for deal lawyers. Whereas appraisal rights claims are basically individual in nature, quasi-appraisal has been brought as a potential remedy for a class of all shareholders who have otherwise foregone their appraisal rights.

The differences between appraisal and quasi-appraisal go deeper than just their source in statute or common law. While appraisal is a well-defined “claim” in its own right, quasi-appraisal is far more akin to a remedy than to a claim. While both demand a determination of “fair value,” the vast majority of Delaware case law determines fair value within the confines of the statutory appraisal scheme, including, for example, a bar on considering synergies. Quasi-appraisal is more “amorphous”–as the authors observe–and can frustrate predictability in a merger. Whereas appraisal claims must, by statute, be known (and pressed) at a certain time, quasi-appraisal remedies/claims can pop up later, after the appraisal window has closed.

The authors of this piece also point out that unlike appraisal, the quasi-appraisal remedy is often connected to a breach of fiduciary claim (note that appraisal claims require no breach of any duty and require no proof of any wrongdoing by anyone). Breach of fiduciary duty claims, in turn, are directed at the corporate officers and directors, not the company itself, and those officers and directors, in turn, may have indemnification rights from the company or the insurance that covers claims against them. The takeaway then is that a when a party is seeking quasi-appraisal, it may well involve many more parties and may come up at a time well past the otherwise statutorily set appraisal window. As the authors observe:

[A]s quasi-appraisal claims continue to increase, the predictability that comes with the timely perfection of appraisal rights may be lost. Buyers may need to consider more than just the number of dissenting stockholders and, more specifically, also consider if a class of all (or most) of the stockholders would or could pursue a quasi-appraisal claim against the seller’s former directors for which the buyer might have indemnity responsibility. … [The] intersection of quasi-appraisal remedies and directors’ indemnification rights could put a buyer potentially at odds with a seller’s former directors, and highlight further unanticipated deal risks. Navigating these changing tides in Delaware corporate law is of critical importance, particularly for buyers, and these considerations should receive appropriate attention in the early stages of the deal negotiations.

In Kahn v. Stern, an opinion issued by the Delaware Court of Chancery mid last year, the Court dismissed a breach of fiduciary duty claim seeking, among other remedies, quasi-appraisal damages.  The case arose out of the sale of Kreisler Manufacturing Corporation (“Kreisler”), a small, thinly-traded (listed only on the pink sheets), public aerospace manufacturing company, to Arlington Capital Partners (“Arlington”).  The merger was approved by written consent of a majority of Kreisler’s outstanding shares, without a stockholder vote, and was announced on May 31, 2016.  That same day, Kreisler distributed an information statement to its shareholders to inform them of the deal and allow them to decide whether to exercise their appraisal rights—the deadline for seeking appraisal was June 20, 2016.  Notably, the merger agreement contained an “appraisal out” provision that permitted Arlington to back out of the merger if more than 10% of Kreisler’s outstanding shares sought appraisal (see our prior posts discussing such provisions here, here, and here).  The plaintiff, however, did not seek to enjoin the merger pre-close or exercise his appraisal rights by the appraisal cutoff.  Instead, the plaintiff filed a complaint for breach of fiduciary duty against the Kreisler board days after the appraisal deadline had passed.

The complaint, among other things, alleged that the Kreisler board breached its fiduciary duties by: (1) approving the transaction in light of certain “side deals” that were negotiated by two inside directors in connection with the merger, and (2) making misstatements and omissions in the information statement provided to Kreisler’s shareholders.  With regard to the disclosure claims, the plaintiff alleged that the defendants knowingly withheld or misrepresented material information in the information statement to reduce the likelihood that Kreisler’s shareholders would prevent the merger by asserting appraisal rights, and in so doing, the defendants deprived Kreisler’s shareholders of their ability to make a fully informed decision regarding their appraisal rights.  In light of the injury caused by these alleged disclosure deficiencies, the plaintiff sought quasi-appraisal damages.

In deciding the disclosure claims, the Court noted that if the plaintiff had sought injunctive relief before the merger closed, such relief may have been warranted.  The Court explained that, in the pre-close, injunctive relief context, the Court would have applied enhanced scrutiny and looked to whether the information statement withheld or misstated information material to the stockholders’ decision to approve the deal or seek appraisal.  In the post-closing, damages context, on the other hand, the Court explained that the plaintiff must have alleged facts making it reasonably conceivable that the director defendants, who were found to be independent and disinterested and were protected by an exculpatory charter provision, acted in bad faith in issuing the disclosures.  The Court found that nothing in the record, even in light of the side deals and appraisal-out provision, created an inference that the alleged disclosure deficiencies were made in bad faith.  Thus, the Court dismissed the disclosure claims, which included the plaintiff’s request for quasi-appraisal damages.

For additional insight on the Court’s views on the quasi-appraisal remedy, see our prior post here.

In last month’s decision in Houseman v. Sagerman, Vice Chancellor Glasscock addressed the common law analogue to Delaware’s appraisal rights statute – the remedy of “quasi-appraisal” for a breach of fiduciary duty.  In the November 19 opinion, the court described a long litigation history stemming from the merger of Universata, Inc., into an LLC purchaser.  The Housemans, shareholders of Universata, did not in the first instance exercise statutory appraisal rights, choosing instead to sue a putative purchaser of their shares under a “put contract” in Minnesota.  The Minnesota state court dismissed that breach of contract action in 2012.  More than two years after the close of the Universata merger, the Housemans filed a complaint in Delaware Chancery alleging breach of fiduciary duty in the sale process.  Of interest to us was the Court’s discussion of the Housemans’ claim for quasi-appraisal.  Vice Chancellor Glasscock observed that quasi-appraisal was not a cause of action at all, but was rather a remedy available to shareholders upon a finding of a breach of fiduciary duty.  The Vice Chancellor acknowledged that there could be confusion as to what, exactly, quasi-appraisal was, but made clear that it is ultimately a remedy whereby the court awards shareholders damages “based on the going-concern value of their previously owned stock” upon an appropriate finding of liability.  For background on the quasi-appraisal remedy in stockholder litigation in general, see this article from the HLS Forum on Corporate Governance and Financial Regulation.

Notwithstanding the ostensive viability of their claim, the Housemans would not receive quasi-appraisal – not because it was not a cause of action, but because of the doctrine of laches, an equitable doctrine similar to a statute of limitations that bars a cause of action when there is prejudicial delay in bringing it.  In the Houseman case, the plaintiffs waited 27 months to bring a breach of fiduciary duty claim (and thus seek quasi-appraisal), choosing to litigate the Minnesota breach of contract issues in the first instance.  The Court thus granted summary judgment to defendants on the breach of fiduciary claim, and in doing so barred the quasi-appraisal remedy, as the claim was simply brought too late.

**Update on January 21, 2016: the Westlaw Journal has now covered the same case discussed in this post:  Houseman et al. v. Sagerman et al., 31 Westlaw Journal Delaware Corporation Law Update 3 (2016).