In reviewing current “hot topics” in M&A, law firm Sullivan and Cromwell writes this about the current state of appraisal, given the continued developments from multiple major appraisal cases in the past couple years:

“Post-Aruba Appraisal Landscape: Following the Delaware Supreme Court’s decision in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. (April 17, 2019), in which the Supreme Court reversed the Chancery Court’s finding that unaffected market price was fair value in favor of the deal price less synergies, there have been three appraisal decisions issued: (1) In re Appraisal of Jarden Corporation (July 19, 2019); (2) In re Appraisal of Columbia Pipeline Group, Inc. (August 12, 2019); and (3) In re Stillwater Mining Company (August 23, 2019). While the Delaware judiciary has not expressly established a presumption that the deal price is fair value, it has consistently, like in Columbia and Stillwater, relied on the deal price to determine fair value when the sale process has objective indicia of deal-price fairness (e.g., (1) arm’s-length transactions with third parties, (2) absence of board conflicts, (3) due diligence by the acquiror involving confidential target information, (4) multiple price increases extracted by the target company and (5) lack of alternative bidders (whether evidenced through active or passive market checks)). However, Jarden demonstrates that, in cases where there is a deficient sales process, unaffected market price may still provide a reliable indicator of fair value, and a finding that the deal price is unreliable does not necessarily mean that the fair value will be greater than the deal price. Columbia and Stillwater also highlight that a respondent must prove synergies to reduce fair value below the deal price and that traditional valuation analyses may not receive much weight, particularly if there is a legitimate debate among competing experts concerning the inputs.”

*Lowenstein Sandler LLP acts for petitioners in a matter discussed in this quotation.

To demand appraisal, at least in Delaware (and to our understanding, the Cayman Islands as well), a shareholder must do more than simply dissent (or at least not vote “for”) the transaction. A shareholder must ‘perfect’ their appraisal rights – in effect, they must take certain mechanical steps to actually demand appraisal.

But because of the arcana of how stock is actually held in the United States (and some other jurisdictions), demanding appraisal is not always the simplest task. As background: in the US, the vast majority of stock is held in “street name” and in “fungible bulk.” This means that the beneficial owner – what we would call the “shareholder” in common parlance – is not the “holder” of much at all: only a book entry in an account with their broker or similar institution. That institution, in turn, holds a book entry with the Deposit Trust & Clearing Corporation (DTCC). (Even this description is oversimplified, as there are additional entities, including Cede & Co., involved in the process as nominees.)

DTCC, or its nominees, is generally the “record owner” of the shares  at issue – and thus, as a technical matter, the one who actually ‘demands appraisal’ on behalf of the beneficial owner.

The process itself can be complicated, and counsel is almost always involved in generating the necessary documents to get DTCC’s internal processes moving.

But DTCC itself anticipates that it will be involved in the mechanics of the appraisal process and makes some information and several forms available on its website that can help counsel, and investors alike in understanding the mechanics of the process.

In particular, DTCC offers proxy services that an appraisal claimant may need, a review of those services here. It also offers form letters for DTCC communications, including appraisal demands.

One practical consideration for any person in the appraisal space is that interacting with DTCC can take time. And since appraisal demands generally must be made during a specific and relatively limited time period, the need to build in time for DTCC to act is critical in preparing the appraisal campaign.

We’ve posted before that appraisal has multiple factors: appraisal can be a valuable tool for investors seeking additional returns; it can fit within a larger strategy around a merger; and appraisal itself can be a consideration for deal-professionals looking at merger structure, concerned about quasi-appraisal remedies, or those determining the mechanical steps necessary for a merger.

A recent guide published by Latham & Watkins reviews the US merger process (mostly from the acquirer point of view) and highlights how appraisal consideration should be part of the merger review process.  The guide goes over what Latham considers common shareholder litigation related to mergers, focusing on pre-merger suits and appraisal actions Appraisal is, of course, a post-merger remedy not available on a “class” wide basis, but instead available only to dissenting investors who demand appraisal.

Like other items in the guide, the possibility of appraisal (including whether appraisal rights apply in the transaction at issue, or whether acquirer shareholders have appraisal rights…) is something that deal-professionals must take into account as they work on the merger.  Deal strategy can take into account appraisal, and appraisal-related considerations.  Further, by taking into account the possibility of post-merger appraisal actions from the very start, deal-professionals can seek to reduce or avoid the kinds of process problems that courts have focused on in numerous appraisal cases.

Corporate shareholders possess important inspection, or information rights, in most jurisdictions. In Delaware, inspection rights are codified under Section 220 of the DGCL. Inspection rights provides shareholders with a “proper purpose” the ability to review certain “books and records” of the company. Both the proper purpose criterion and the breadth of the books and records available for shareholder inspection have been recurring areas of litigation and Court decision. In recent years, 220 demands have become more common, and thus litigation involving this shareholder right more common and decisions more varied.

According to at least one post on the Harvard Forum on Corporate Governance, the reason for that is at least partially because Delaware courts have invited it and the resulting decisions have continued to evolve the law.

Per this post, reviewing developments in DGCL 220 law, the headlines for those interested in this critical shareholder right are:

  • Only in limited circumstances will emails and text messages be available for inspection – but they may be available sometimes!
  • The proper purpose must align with the purpose of counsel bringing the action. Differences in purpose between the shareholder and their counsel may be fatal to the 220 demand.
  • The proper purpose requirement is not just a “speed bump” and requires at least some evidence.

We will continue to cover DGCL 220 issues as this important shareholder right intersects with many others, including appraisal rights.

Legal news site Law360 has set out its “cases to watch” in Delaware for 2020 [$$$], including the Jarden appraisal and a case where an appraisal action led to a legal malpractice claim. In the case of Jarden, which we’ve covered before, is being appealed to the Delaware Supreme Court, and if ultimately heard, promises to both further clarify and further complicate the appraisal landscape. Also before the Supreme Court is a case where an appraisal action has led to a now long-running fight involving allegations of legal malpractice. In that case, ISN Software, while having a nucleus involving appraisal, the core issue is one about statutes of limitations and when claims accrued.

Governor John Carney has nominated Prickett Jones & Elliot, P.A. partner Paul A. Fioravanti, Jr. to the Delaware Court of Chancery. The seat was left open by Justice Tamika Montgomery-Reeves’ nomination to the Delaware Supreme Court. At Prickett Jones, Fioravanti focused on corporate and commercial litigation, including mergers and acquisitions, fiduciary duty obligations, corporate governance, and LLC litigation. The Delaware Senate is expected to consider his nomination later this month. As covered in this Law360 article [$$$], the nomination comes amid a series of changes on Delaware’s Court of Chancery and Supreme Court, including the retirement of Delaware Supreme Court Chief Justice Leo E. Strine, Jr. and the expansion of the Court of Chancery from five to seven vice chancellors.

The Brazilian government proposes strengthening protections for minority shareholders in the wake of corruption scandals, such as Petrobras. The new law would allow minority shareholders the right to seek judicial compensation in the event of misconduct by the company’s board. Shareholders of Brazilian corporations are already entitled to appraisal rights, subject to a few exceptions, and thus the new rules would provide minority shareholders with additional tools to enforce corporate governance.

Transamerica, a provider of numerous mutual funds as well as an insurance company, includes voting for appraisal rights in its proxy guidelines. Like other funds we have covered, Transamerica also states that it votes on mergers on a case by case basis. Transamerica is part of a significant set of funds that, by policy, vote for the return or provision of appraisal rights when such items come up for a vote. This is particularly relevant for companies hailing from jurisdictions without appraisal rights, and demonstrate how appraisal is a positive for investor rights.

Stewart Investors, an asset manager focused on the equity of companies in emerging markets, has a policy to vote “for proposals to restore, or provide shareholders with, rights of appraisal.”  Like with many other investors, Stewart also says that it will vote for mergers on a case by case basis, consistent with the idea that it supports appraisal rights and acknowledges that not every merger proposal is in the best interests of shareholders.

An emerging markets fund faces an appraisal landscape more diverse than even the already complex U.S. appraisal landscape.  We’ve covered before appraisal regimes in various foreign jurisdictions, including Turkey, South Africa, and Ukraine, among others.  Investors who are involved with companies outside the US face varied shareholder rights regimes that can be both more or less shareholder friendly, depending on the right, as compared to the “usual” U.S.-Delaware regime.

Law360 highlights several appraisal decisions in its list of the biggest Delaware cases of 2019. The article notes that among the 2019’s notable Supreme Court decisions was Aruba Verition Partners Master Fund Ltd. et al. v. Aruba Networks Inc., where the Court rejected reliance on Aruba’s stock price in determining fair value.  The article also mentions two major decisions from the Delaware Court of Chancery – In re: Appraisal of Jarden Corp., and In re: Appraisal of Columbia Pipeline Group Inc. We have covered ArubaJarden, and Columbia Pipeline extensively over the past year.