On Nov. 5, 2019, PLI hosted a roundtable on Delaware developments at the 50th Annual Institute on Securities Regulation, where the speakers discussed recent Delaware appraisal decisions. The panel consisted of Patricia O. Vella, Lawrence A. Hamermesh, Lisa A. Schmidt, and the Honorable Collins J. Seitz Jr. Webinar registration can be accessed here.

Law360 has published this analysis of the advantages and disadvantages of various structuring options when dealing with a British Virgin Islands acquisition. Notable to appraisal is the diversity of appraisal rights/dissenters; rights offered (or not offered) in the various structuring options. For example, if using a “merger” of “tender offer,” the article details that appraisal rights are available, except in certain specific instances. But if using a “scheme of arrangement” – a form of court-supervised combination – appraisal rights are only available if allowed by the court.

Consideration of appraisal rights in deciding what kind of legal process a company will engage in to effectuate its merger is not new. We have seen similar issues with Cayman appraisal, and in the U.S., the 2018 Dr. Pepper decision suggested the possibility of more U.S. companies using a reverse triangular merger to avoid appraisal rights (though some commentators argued this would not occur).

Appraisal rights/dissenters’ rights and choosing the correct form of acquisition arrangement are intimately connected – apparently in the BVI as well.

Legal news site Law360 provides this analysis [$$$] of what has occurred in Delaware law in the third quarter of 2019, including developments in appraisal. As the Delaware courts have grappled with the trio of Delaware Supreme Court decisions impacting appraisal – DFC Global, Dell, and Aruba – the decisions coming from the Chancery courts – some currently being appealed* – continue to both define what factors courts will consider in appraisal proceedings and blur the line between appraisal (at least in instances of appraisal arbitrage) and fiduciary duty litigation, where actual wrongdoing is required.

*Lowenstein Sandler is counsel to petitioners in certain cases mentioned in the Law360 piece.

On Oct. 24, Potter Anderson & Corroon LLP presented a webinar on the Delaware Limited Liability Company Act (DLLCA), including amendments to contractual appraisal rights. We noted previously that this update was occurring.

The webinar highlighted that this year’s amendments to the DLLCA now provide for contractual appraisal rights in new situations. Previously, the DLLCA allowed contractual appraisal rights in connection with any amendment of an LLC agreement; a merger or consolidation in which the limited liability company is a constituent party; a conversion to another business form; a transfer to, domestication, or continuance in any jurisdiction; or a sale of all or substantially all of the limited liability company’s assets. The recent amendment allows the LLC to also contractually provide for appraisal rights in connection with “any division of a limited liability company, any merger or consolidation in which a registered series is a constituent party, any conversion of a protected series to a registered series of such limited liability company, and any conversion of a registered series to a protected series of such limited liability company.” In contrast to the Delaware General Corporation Law, there are no default rights for appraisal under the DLLCA. For appraisal rights to be available to members of the LLC, they must be contractually provided for.

Members of an LLC may now have the contractual right to appraisal in connection with a division. The concept of a division is still relatively new under Delaware law and was provided for by last year’s amendment. Section 18-217 of the DLLCA allows an LLC to divide into two or more distinct Delaware LLCs according to a plan of division.

Members also may have the contractual right to appraisal in connection with any merger involving a registered series or any conversion from protected series to a registered series, or vice versa. Last year’s amendment to the DLLCA introduced the terms “protected series” and “registered series.” Both protected series and registered series are protected against the liabilities and obligations of the LLC. But unlike a protected series, a registered series is formed by filing a certificate of registered series with the Delaware Secretary of State.

We will continue to monitor and report on how these contractual appraisal rights affect investors in LLCs.

Camelot Portfolios, an Ohio-based investment fund, is launching a new appraisal-focused fund. Camelot is no stranger to the space, since it uses appraisal strategies in an existing fund. The new fund will join a number of other funds offering exposure to appraisal strategies. Appraisal arbitrage has long been a strategy of certain investment funds; the strategy isn’t new (see, e.g., this 2007 presentation on the topic), but remains somewhat misunderstood within the larger world of appraisal rights/dissenters’ rights.

Critically, appraisal rights/dissenters’ rights exist in numerous jurisdictions, and often exist for private and public companies. This “wider world” of appraisal usually involves aggrieved minority shareholders who are “historical” or “legacy” shareholders – i.e., owners of company stock before the announcement of a merger.

Somewhat different is appraisal arbitrage – a strategy whereby a nonhistorical holder purchases stock after the announcement of a merger. Historically the province of “merger arbitrage” firms, appraisal arbitrage adds an additional option to those firms’ toolbox. Whereas historically an arbitrageur who believed the merger price too low was stuck buying up some stock and hoping for a counter-bidder, appraisal arbitrage allows that investor to purchase stock and seek appraisal.

While appraisal arbitrage cases have dominated the Delaware landscape for years, it is important to remember that the world of appraisal remains far broader than just Delaware public-company appraisal arbitrage. Appraisal rights are critical investor protections, provide a useful check on management, and give minority shareholders leverage if a majority shareholder is acting in an oppressive manner or is taking an action that provides insufficient value to the minority interest.

Loomis Sayles, an investment manager based in Boston, includes in its proxy voting guidelines {page A-100} a rule to vote “for proposals to restore, or provide shareholders with, rights of appraisal.” This is similar to a number of other investors we have previously covered – including pension funds, state investment boards, major proxy services, and other investment managers. Thematically, it’s clear that investors view appraisal as an important and valuable right.

Delaware’s Governor has made a double nomination to fill departing Chief Justice Leo Strine Jr.’s seat on the Delaware Supreme Court.  Current Delaware Supreme Court Justice Collins J. Seitz Jr. has been nominated to take the role of Chief, and Vice Chancellor Tamika Montgomery-Reeves has been nominated to fill Justice Seitz’s seat.

With respect to appraisal and how these nominations may ultimately shape Delaware law, Law360 [$$$] quotes Professor Minor Myers as saying “Given Seitz’s experience at a boutique Delaware firm that represented clients as plaintiffs, I think elevating him to chief justice could send an important signal to investors that the playing field is level in the Delaware courts[.]”

For those interested in appraisal outside the US, the recent text Cross-Border Mergers, now available, containing a chapter on EU appraisal and a discussion of why the EU has not seen a rise in appraisal activity – unlike the US. We thank the author of the chapter, Professor Seretakis, for the excerpt below:

Appraisal rights, a protection mechanism for minority shareholders, have recently captured the attention of academics and policymakers. The rise of a new breed of hedge funds which specialize in so-called appraisal arbitrage has resulted in a spectacular increase in appraisal petitions in connection with M&A transactions in the US and has led to calls for a tighter regulation of the appraisal remedy. Despite the growing popularity of appraisal rights in the US, this protection mechanism remains underutilized by shareholders in the EU. After discussing the general framework for merger transactions in the US and the EU, the present chapter will seek to offer an examination of appraisal rights in the US and the EU. Furthermore, it will discuss how shareholders, and in particular hedge funds, exploit the appraisal remedy in order to reap profits and assess the dangers posed by this practice. Finally, the paper will seek to decipher the factors that have led to the surge of the appraisal remedy in the US and its underutilization in EU.

On October 24th, LexisNexis, CSC, and law firm Potter Anderson & Corroon LLP will present a webinar on the Delaware Limited Liability Company Act, covering 2019 amendments and recent caselaw. Topics will include contractual appraisal rights – as well as mechanical issues involving electronic signatures, LLC series and other changes.

The webinar registration can be access here.

JD Supra posted about the availability of freeze-out mergers as a legal avenue for majority owners of private companies in Texas. The author noted that the freeze-out merger is a legal avenue that is “used with some regularity in Texas and is rarely disallowed by the governance documents of most companies.” According to the post, minority members who are being frozen out may be able to exercise their dissenter rights and receive “fair value for their interests.” We have previously posted about dissenter rights in Texas, and about appraisal in freeze-out mergers, where appraisal may be the only real avenue of recovery for an aggrieved investor.