In the 12th Edition of the Mergers and Acquisitions Review, the entry regarding the Caymans Islands includes discussion of the Cayman appraisal regime and confirms what other commentators have observed: Cayman Islands appraisal is in flux as the result of appeals of some of the first major appraisal decisions in that jurisdiction.  Like in Delaware, Cayman courts have to contend with various precedents, some of which are later overturned or modified.  In particular, recent Cayman decisions have dealt with minority discounts, cost-sharing, and other issues relevant to appraisal.

** Lowenstein Sandler does not practice in the Cayman Islands.

Appraisal cases increasingly focus on how markets react to merger news and what one learns from that.  Recent cases that have looked to “unaffected” merger price – that is, the price of a share of the target company before the merger announcement – in part because of the fundamental truth that mergers are market moving events.

So are the breakup of mergers. The case of Fresenius and Akorn, pending before Vice Chancellor Travis Laster, while outside the realm of appraisal, has seen the Vice Chancellor asking questions of the parties very close to the kind of questions one sees in appraisal. As this analysis from Law360 [$$$] discusses, the Vice Chancellor pressed the parties’ lawyers on how the market was valuing Akorn with the uncertainty of the merger. While ‘merger price’ in the deal is $34 a share, Akorn trades for less than $20 a share – and the Vice Chancellor noted that without a deal at all, one would imagine the market price would be even lower.

This line of questioning – and the economic principles underlying it – suggest more than such a limited reading. Akorn’s market price is a reflection of information and risk. Certainly, even if Akorn was an incredibly attractive asset at $33, any buyer would need to consider the mess of the litigation, and the risk that Akorn is force-sold to Fresenius, in their valuation. This analysis highlights the fact that a pending merger bid (no less pending merger litigation) can distort the market price – something that the appraisal remedy aims to address.

For more on the Akorn Fresenius litigation, see the Law360 coverage [$$$].

Fresenius has prevailed at the Chancery court level.

Appraisal rights are creatures of statute, and as a result, for the most part, the conditions for appraisal are laid out by the legislature. Many statutes provide for appraisal rights in instances where there is a “merger” – what one might traditionally understand as an entity purchasing another entity, or purchasing all the stock of another entity. But merger-esque corporate actions can come in numerous flavors and types, and not all of them will carry appraisal rights. In many instances, the merger-esque transaction is not termed a merger at all, a notification of appraisal rights is not generated, and investors may be left in the dark about the fact that a merger-in-fact (but not called a merger) is occurring where they have valuable appraisal rights.

Enter the de facto merger doctrine. The de facto merger doctrine, usually associated with successor liability, looks to the underlying reality of a transaction to determine if it is actually a merger (and thus, would usually carry appraisal rights), or something else (that may not). Professor Bainbridge recently explored this topics with respect to California, highlighting a difference between California (which recognizes the doctrine) and Delaware (whose courts have a very restrictive view of the doctrine, to the point it is not often available).

In the context of appraisal, and in light of the Dr. Pepper decision we covered before, it’s important to note that not every transaction termed ‘not-a-merger’ will be free of appraisal rights. Critically, Dr. Pepper is a Delaware case.  Appraisal rights in other states may well be available for de facto mergers where those states have a more expansive view of the de facto merger doctrine than Delaware does. The name of the transaction does not always control, and doing a careful evaluation of the transaction is critical to determining whether there may be otherwise unexplored remedies for an aggrieved investor.

Not really, and definitely not in the way Delaware does, at least according to this 2013 analysis.

Hong Kong lacks a general appraisal remedy; instead, at least for public companies, the takeover must be evaluated by an independent advisor and those finding made available to shareholders.

Considering Canadian and Cayman Islands appraisal rules, we see great diversity across appraisal regimes worldwide, even among jurisdictions that have a common legal-ancestor (English common law).

**Lowenstein Sandler does not practice in Hong Kong.  Consult a Hong Kong attorney for questions regarding Hong Kong law.

Appraisal sits in a somewhat odd area between what is traditionally understood as ‘class’ litigation – i.e., when a person or persons seeks to represent an entire group of all ‘similarly situated’ persons.  This is the model of the vast majority of securities litigation, consumer fraud litigation, mass tort, and other claims.  The benefit to the representative-plaintiff is that the potential damages are aggregated, even where a single persons damages would be minuscule and not worth litigating; the downside is that the decisions made in the class, including things like settlement, can bind all persons in the class.

On the opposite pole of class claims are individual claims – the plaintiff brings their claims on behalf of themselves, and does not purport to represent others.  While the individual plaintiff cannot aggregate, they also cannot bind the rest of the group.

Enter appraisal – which is not a class action, but is a collective action.  We’ve covered the anatomy of an appraisal action before, but a brief recap is: anyone who may wish to seek appraisal must dissent.  Not every dissenter seeks appraisal.  And not every person seeking appraisal needs to file a petition.  And not every petitioner becomes lead petitioner.  But, the decision in the appraisal action will ultimately bind not all of those entities – from lead petitioner all the way down to dissenter.  On the other hand, lead petitioner does not get to keep a share of passive appraisers’ merger uplift – at least not in a traditional sense.

This issue, along with others relevant to appraisal, will be covered in the forthcoming textbook Representative Shareholder Litigation.

We look forward to reviewing another take on this interesting issue in appraisal and will follow-up after this text is officially released.

While some of the largest businesses in the United States are corporations (i.e., incorporated entities under a state’s corporations law), many businesses today are also formed as Limited Liability Companies, LLCs for short. An LLC is a creature of state statute; Delaware, California, Florida (among many other states) have LLC statutes allowing for the creation of this often modular business form. LLCs have “members” who own interests in the LLC. Do members have appraisal rights? Depends on the state.

Some states, notably California, Florida, Minnesota, New York, and Washington provide for statutory appraisal rights for LLC members. Other states, including Delaware and Arizona, provide LLC members appraisal rights only if the operating agreement provides for appraisal rights – effectively allowing an LLC member to contract for appraisal rights in the formation documents. Why would someone include appraisal rights in an operating agreement? One answer, coming from Arizona law, is that providing for an “out” via appraisal rights may allow a dissenter to be bought out at fair value, instead of encouraging the dissenter to seek dissolution of the LLC as a remedy for their oppression. And, of course, an investor may insist on an appraisal condition in the operating agreement.

In “Appraisal Arbitrage: In Case of Emergency, Break Glass” – a student note published in the Notre Dame Law Review (93 Notre Dame L. Rev. 2191) – the author lays out a case for why appraisal, including appraisal arbitrage, remains critical to the overall scheme of shareholder protection. As the author observes, many a critique of appraisal focus on the “who” of recent appraisal cases, focusing their attention on the appraisal arbitrage strategy and decrying that arbitrageurs (as opposed to, one must believe, long term shareholders who may not be as well positioned as arbitrageurs to pursue an appraisal case) are bringing appraisal cases at all. The student note points out that this focus on “who” has lost sight of “why” appraisal exists in the first place and what has been revealed by many of the appraisal cases of the past: many appraisal cases are meritorious in that they reveal (and result in) premia to below-fair-value merger prices. The author also highlights critical research on what the appraisal remedy does for even shareholders who don’t exercise it: brings up merger premiums. The note concludes with a worthy summation of why appraisal remains a valuable remedy in the shareholder arsenal: “appraisal still has value as a deterrence method and as protection for minority shareholders. Shareholders need a functioning emergency switch in the form of the appraisal remedy, and Delaware, whatever its next actions in this space, must tread carefully to preserve it as such.”

The Review of Securities & Commodities Regulation recently published “The Shift in Delaware Appraisal Litigation” (full article $$$), suggesting, as have other authors, that Delaware appraisal has moved to a realm where process questions are central to the appraisal analysis. This will be little surprise to readers of this blog; while appraisal is distinct from fiduciary claims, recent cases have focused increasingly on a search for process issues, and the absence of issues with the sales process has led some Delaware Chancellors to conclude that merger price (or other price) is the proper measure barring such process issues. Whether that will continue as the caselaw develops in 2018 is yet to be seen; and as Court’s clarify what can be problematic about a process we may well see decisions giving greater clarity to where one can expect the “shift” to take us.

Probably – at least according to this analysis posted on the Harvard Corporate Governance Forum.  The analysis provides extensive discussion of Norcraft and Solera**, two recent decisions we’ve also noted.

The authors conclusion will be familiar to regular readers of this blog: “appraisal decisions likely will continue to focus on many of the same issues that courts examine when considering breach of fiduciary duty claims in the merger context as well as assessing whether the seller’s stock trades in an efficient market.”  As other authors have suggested, sales process and market efficiency may be the new focus of appraisal proceedings – seemingly a litigation crossover from fiduciary duty litigation (as to process) and fraud litigation (market efficiency).

** This firm is counsel of record to petitioners in the Solera matter.

State legislature somewhat regularly make amendments and updates to their corporate laws, including laws regarding appraisal.  We’ve covered Delaware updates before, including the 2018 and 2016 amendments.

North Carolina, another state with appraisal rights, made updates to its appraisal laws as well this year.  Senate Bill 622, signed into law in June, took effect as of October 1.

North Carolina’s amendment extends appraisal rights to non-voting shares of a corporation, which is a change that brings North Carolina into line with Model Business Corporation Act.  Notably, the Model Act originally did not provide appraisal rights for non-voting stock; but the Model Act itself was amended, and now North Carolina has amended as well.  The amendments also make changes to the exercise of appraisal in “second-step” mergers following a tender offer, which is something Delaware’s 2018 amendments have also addressed.  For more on the North Carolina amendments, including discussion of the amendments that are not appraisal-oriented, see these articles.