Today Vice Chancellor Laster issued his ruling in the Aruba Networks appraisal case. The award set the stock’s fair value at Aruba’s thirty-day average unaffected market price, which was $17.13 per share, well below the merger price of $24.67.
Cooley LLP provided a recap of 2017 M&A, along with an outlook for 2018 for Lexology, which includes a discussion of appraisal conditions in private M&A deals. We have blogged previously about the possibility of acquirers including appraisal conditions in public deals.
This 2018 M&A Outlook is a good reminder of the role that appraisal plays in mergers of non-public companies. As Cooley observes: “While the inclusion of any appraisal rights condition remains uncommon in public deals, we commonly negotiate these conditions in private sales of venture-backed companies. Commonly accepted conditions take one of two forms: the absence of available appraisal rights altogether or appraisal rights not having been exercised by a certain percentage of shares.” The piece further suggests the legality of any such advance waivers of appraisal rights “has not been resolved by the courts.”
As reported by Pensions & Investments, the Arkansas Teachers Retirement System has committed $30 million to an alternative asset manager specializing in appraisal opportunities. Further highlighting the focus on appraisal, the Fund committed an additional $30 million to a different fund, but agreed to expand that fund to include appraisal.
As we’ve blogged about before, appraisal can be both a critical investor protection and a viable way for investors to increase returns in M&A deals. The past several years have seen more institutional investors getting involved in appraisal – something some have suggested is part of the duties they have to their beneficiaries.
We’ve posted before about the availability of appraisal rights in the Cayman Islands. In this post, we focus on a specific merger involving a Cayman Islands company to highlight some of the important considerations in Cayman appraisal.*
A number of Cayman companies are listed in the United States, a subset of which are companies with their headquarters in the People’s Republic of China. Chinese companies may use the Cayman Islands as a “bridge” between mainland rules and listing rules, taking advantage of certain legal structures, such as variable-interest entities (VIEs) or similar, in order to comply with their legal obligations in China and in whatever market they list in–such as the New York Stock Exchange or London Stock Exchange.
For our example today, we focus on just one way Chinese-qua-Cayman companies may operate: issuing American depository shares, or ADS. ADS are not, per se, shares of the Cayman company itself–even if, by contract, an ADS holder receives the economic benefits of share ownership. Rather, ADS are issued by depository institutions (such as U.S. banks), in U.S. dollars. In turn, the depository institution has a contractual arrangement with the Cayman company, whereby the depository institution itself holds the Cayman company shares.
While this arrangement may seem confusing, it actually is not all that different from the share ownership arrangements in the United States, which involve the Deposit Trust Clearing Corp., its nominee Cede & Co., and a network of brokers (depository institutions) who hold stock in “street name.”
For our example, the merger at issue contained the following announcement**:
Critically, the Cayman company tells ADS holders–effectively any U.S. shareholder–that in order to perfect their appraisal rights in the Caymans, they will need to execute a few steps. In particular, they will need to surrender their ADS to the depository institution, convert the ADS into company stock (i.e., Cayman stock), register the Cayman stock, pay a fee to the depository institution, and then certify its instructions (or lack thereof). And that’s just the procedure to get to a point where investors can potentially exercise their rights!
While this may seem like a tall order, these steps are fundamentally ministerial–but this can take a very long time.***
Nonetheless, after conversion, a dissenter does have Cayman appraisal rights, something the announcement confirms:
Like in Delaware, merger dissenters in Cayman can seek appraisal of their shares. It just may take a few additional steps–and more time–to get there.
* Lowenstein Sandler LLP does not practice law in the Cayman Islands and does not advise on issues of Cayman law. This blog post is for informational purposes only, summarizes an existing, publicly available merger announcement, and should not be taken as legal advice as to the specifics of Cayman law.
** All images herein are taken from the publicly filed merger announcement of JA Solar Holdings Inc. For a fuller statement of the ADS portion of this announcement, see here.
*** We thank Ben Hobden of ConyersDill for his input.
2017 was an active year in appraisal, with a number of anticipated decisions – including the recent Dell, DFC Global, and PetSmart opinions. 2018 looks to be filled with further developments. A trio of Law360 articles have highlighted the robust appraisal activity of 2017 – and suggested some cases to watch in 2018. Contributors from Morris Nichols noted the increased activity in appraisal in 2017 in a piece titled “Delaware Litigation 2017: Assessing Trends At Year-End” [$$]. Writers at Law360 also highlighted the Solera appraisal case as one to watch [$$]. Summing up 2017 in review, and perhaps predicting a still-evolving landscape, the authors of “3 Things For M&A Attys To Know About Delaware Law In 2018” [$$] pointed out that “The main takeaway from the numerous appraisal decisions seems to be that there is still no definitive guide to knowing exactly how the Delaware courts will determine fair value for a given deal, as it all depends on the specific circumstances.” As courts wrestle with the specific circumstances of each case, we expect a busy 2018 in appraisal.
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.”
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.
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.
Yes, according to this posting. Delaware law requires that a shareholder seeking appraisal must not have “voted in favor of the merger” (which is impossible for nonvoting common stock) nor “consented thereto in writing pursuant to Section 228.” The mere fact that stock is issued as non-voting, as some recent IPOs have done, does not strip it of appraisal rights.
Seven years ago this week, in Roam-Tel Partners v. AT&T Mobility, C.A. 5745-VCS (Del. Ch. Dec. 17, 2010), then-Vice Chancellor Strine held that in a short-form merger, a stockholder can revoke its prior waiver of its appraisal rights within the twenty-day statutory election period, absent any prejudice to the corporation. In that case, the stockholder submitted to the company a letter of transmittal along with his stock certificates, but then changed his mind, returning their (uncashed) check and timely demanding appraisal. The court compared his initial decision in accepting the merger consideration to that of submitting a proxy in a long-form merger, which is freely revocable at any time prior to the shareholder vote.
In such transactions, shareholders are thus permitted to reverse their tender and opt instead to appraise so long as they do not actually accept the merger consideration and submit a timely appraisal demand within the statutory period.