In contrast to the United States, where an enabling legal regime and a fortunate confluence of a variety of factors have led to a surge of appraisal petitions and appraisal arbitrage, the appraisal remedy remains a sparingly utilized weapon in the arsenal of shareholders in the EU. Minority shareholders in the EU are reticent to exercise appraisal rights. One could plausibly argue that appraisal rights serve as a remedy of desperation for shareholders in the EU. The appraisal remedy is viewed as a last resort measure by shareholders. Furthermore, in cases where shareholders exercise their appraisal rights, their interventions tend to be incidental and ex post. Despite the fact that some U.S. hedge funds that are willing to use appraisal rights as part of their overall strategy are increasing their activities in the EU, a variety of factors, including a hostile legal regime, hinder the growth of appraisal and appraisal arbitrage in the EU.

In particular, the lack of harmonization of appraisal rights across EU Member States severely hampers their exercise. The European legislature has not yet introduced a U.S.-style general appraisal right with respect to fundamental corporate changes. Article 4(2) of the Cross-Borders Directive, which regulates cross-border mergers in the EU, allows but does not require Member States to adopt provisions designed to ensure protection for minority shareholders who have opposed the merger. The Directive is rather vague as to who qualifies as a minority shareholder, which company’s (surviving or disappearing entity) minority shareholders will receive protection, and the form of the protection. As a result, Member States’ rules regarding appraisal rights exhibit significant differences with respect to the events triggering appraisal rights, the form of appraisal rights, and the procedural requirements for exercising appraisal rights. Nevertheless, there is growing momentum for the introduction of harmonized appraisal rights in the context of cross-border mergers. The 2013 Study on the Application of the Cross-Border Mergers Directive identified the lack of harmonization regarding minority shareholder protection as an obstacle to cross-border merger activity. Following the 2012 EU Commission Action Plan on European Company Law and Corporate Governance, which announced that the Commission would consider amendments to improve the Cross-Border Mergers Directive, the Commission launched in 2014 a Consultation on Cross-Border Mergers and Divisions. The majority of respondents were in favor of harmonization of minority shareholder rights in connection with cross-border mergers. Their preferred method of harmonization was full harmonization. Most notably, proponents of harmonization considered the right to request compensation, namely appraisal rights, as the appropriate remedy.

Overall, investors have strongly voiced their concerns regarding the lack of harmonization in the context of cross-border mergers, arguing that multiple divergent legal regimes are an obstacle to cross-border deal activity. The divergence of legal rules imposes significant costs, introduces uncertainty, and can hinder the free movement of capital, one of the key elements in the EU single market. For a fuller discussion of EU appraisal, see Prof. Seretakis’s paper here.

** Lowenstein Sandler LLP thanks Professor Seretakis of Trinity University College Dublin for his contribution to this blog.  Professor Seretakis focuses on issues of law and finance in the EU.  His profile can be found here.  Lowenstein Sandler LLP does not practice law in the European Union.

In certain mergers, shareholders of Bermudian corporations will have appraisal rights.  For much more on Bermuda appraisal, see “Bermuda Minority Shareholder Protection and Appraisal Rights” from BeesMont, by Stephanie Sanderson.

Notable is that in a Section 106 merger or amalgamation (most similar to the standard mergers we confront in Delaware), there are appraisal rights for Bermudian corporations; and, different than Delaware, there is no appeal process from the courts’ appraisal decision.  Bermuda is a major destination for insurance and reinsurance companies, including those with operations in the United States.

** Lowenstein Sandler LLP thanks Stephanie Sanderson, a partner of BeesMont, for directing us to her work on Bermuda appraisal.  Lowenstein Sandler LLP does not practice in Bermuda.

Conyers Dill, a Cayman firm, has this new article out about Cayman appraisal, including the recent Trina Solar case.  This article discusses appraisal appeals, payments to dissenting shareholders, and discovery of dissenters.  Notable to US practitioners is that the scope of the discovery of dissenters/petitioners and even whether dissenters/petitioners should be required to give discovery in a Cayman appraisal action remains a live issue.  This is unlike the US, where discovery of dissenting/petitioning shareholders is expected, and has been the subject of disputes in the Delaware courts.  Conyers notes that the “the local statutory appraisal procedure is becoming increasingly well-defined and mature” – with more cases and more precedent, there may indeed be more certainty in Cayman appraisal, just as Delaware law has developed a robust and deep set of appraisal (and valuation) precedents.

** Lowenstein Sandler LLP does not practice in the Cayman Islands; we thank the team at Conyers Dill for their pointing us to this article and their coverage of Cayman appraisal.

CLS BlueSky Blog posts that the Delaware Supreme Court’s recent decision in Dell–and the Delaware appraisal decisions awarding below deal-price in certain appraisal actions–may give cover to Dell Technologies (the Dell of the Dell decision) in its potential rollup of VMware. Dell already owns 82% of VMware stock, according to the post, and may seek to cash out the remaining shareholders. The post expresses concern about the effect of recent Delaware precedent on public stockholders, especially those who face a transaction like VMware, where the only real remedy may be appraisal.

We note the comment of Tom Vos, research associate at the Jan Ronse Institute, who has less concern for public shareholders. Arguing that Dell did not concern a controlling shareholder (as Dell would be of VMware), Vos suggests that Delaware courts would be stricter toward the buyer when that buyer is basically the only bidder.

If the VMware deal comes to pass and there is an appraisal action, we may yet see how the Delaware courts will handle application of the Dell decision to the situation of a controlling shareholder.

The Corporate Council of the Corporation Law Section of the Delaware State Bar Association has put out proposed amendments to Delaware law, including a technical change to Section 262, the statutory basis for Delaware appraisal. Richards Layton, a Delaware law firm, summarizes the proposed amendment:

The proposed amendments would amend Section 262(b) of the General Corporation Law to provide that the “market-out” exception to the availability of statutory appraisal rights will apply in connection with an exchange offer followed by a back-end merger consummated without a vote of stockholders pursuant to Section 251(h). As currently drafted, Section 262(b)(3) provides that appraisal rights will be available for any “intermediate-form” merger effected pursuant to Section 251(h) unless the offeror owns all of the stock of the target immediately prior to the merger. Practically speaking, under existing Section 262(b)(3), holders of shares of stock of a target corporation that is listed on a national securities exchange are entitled to appraisal rights in an intermediate-form stock-for-stock merger in which they receive only stock listed on a national securities exchange even if they would not be entitled to appraisal rights in a comparable “long-form” merger as a result of the market-out exception set forth in subsections (b)(1) and (b)(2) of Section 262. To address the incongruity between long-form and intermediate-form mergers with respect to the availability of appraisal rights in stock-for-stock mergers, the proposed amendments to Section 262(b)(3) provide that in the case of a merger pursuant to Section 251(h), appraisal rights will not be available for the shares of any class or series of stock of the target corporation that were listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the execution of the merger agreement as long as such holders are not required to accept for their shares anything except (i) stock of the surviving corporation (or depository receipts in respect thereof), (ii) stock of any other corporation (or depository receipts in respect thereof) that at the effective time of the merger will be listed on a national securities exchange or held of record by more than 2,000 holders, (iii) cash in lieu of fractional shares or fractional depository receipts in respect of the foregoing, or (iv) any combination of the foregoing shares of stock, depository receipts, and cash in lieu of fractional shares or fractional depository receipts. Accordingly, if the proposed amendments are enacted, exchange offers followed by a merger under Section 251(h) will receive the same basic treatment as long-form mergers requiring a vote of stockholders with respect to the availability of appraisal rights.

We’ve covered before whether appraisal is available in an all-stock deal: generally, it is not. We’ve also discussed the market-out exception and the way in which it is applied in Delaware.

A second technical change in the proposed amendments would clarify the information a corporation must disclose in an intermediate-form merger.

Section 262 was amended in 2016, though whether that amendment achieved what its proponents sought is a subject of debate.

**Update: For another view on the proposed amendments, see Shearman & Sterling’s take.

If a company structures a merger to avoid appraisal rights, does a shareholder have no recourse?  That question will no doubt be part of the debate as City of North Miami Beach v. Dr. Pepper Snapple Group, Inc. is litigated.  In a complaint filed in Delaware Chancery court on March 28, 2018, plaintiffs, a putative class of investors in Dr. Pepper, allege that the Dr. Pepper board has created a merger structure meant to frustrate their appraisal rights and that the merger will ultimately undervalue their shares. Describing the merger structure as one “only a contortionist can appreciate,” the plaintiffs seek to enjoin the merger, announced January 29, 2018, between Dr. Pepper and Keurig, among other remedies [$$].

According to the complaint, the ‘merger’ at issue has been structured as an amendment to Dr. Pepper’s charter, which would multiply the number of Dr. Pepper shares by seven. The shares would be issued to Keurig shareholders, the result being that post-merger/not-merger, Keurig shareholders would own about 87% of Dr. Pepper – a de facto merger, according to the complaint.  In economic effect, Keurig will purchase ‘new’ Dr. Pepper shares (as a result of the total share count being multiplied by seven) and thereby receive a supermajority of total company shares, rather than purchasing 87% of Dr. Pepper on the market or via a tender offer.

How are appraisal rights involved?  The consideration for the share issuance takes the form of a onetime cash dividend for $103.75 per share to pre-amendment shareholders.  Normally, if this were a classic merger, such a deal would be subject to appraisal rights under DGCL §262 – a cash merger has appraisal rights attached.  But the unique Dr. Pepper structure would not provide for appraisal rights – because the stockholders are just approving an amendment, so the theory goes, they are not actually engaged in a merger.

The plaintiff in Dr. Pepper pleads that appraisal rights are meaningful and important to investors, writing “The availability of appraisal provides an important protection for all investors, including small investors who could not otherwise bear the expense and burden of pursuing appraisal actions on their own. This is because the assertion of appraisal rights by the investors who can justify the investment provides a deterrent to corporate misconduct and incentivizes fair pricing.”

This is the fourth lawsuit challenging the Dr. Pepper merger, but one of the relatively rare lawsuits that focus on appraisal rights and their availability in a merger (or not-merger, as the case may be).  We will follow developments in this action.

In this article, Fried Frank LLP attorneys discuss the three appraisal decisions since the Delaware Supreme Court’s decision in Dell Aruba, AOL and SWS. The article notes that while the Supreme Court in Dell directed the Chancery Court to consider the deal price and accord it appropriate weight, these three decisions assigned no weight to the deal price in setting fair value below the deal price.  Given the inconsistency with Dell, the authors suggest that other Chancery cases may not follow the same approach.  Taking a more future-orientation, the authors also predict that appraisal results below the deal price will continue in arms-length mergers without a seriously flawed sales process, but may be above or even significantly above the deal price if the process is seriously flawed.  These predictions have become more common, as authors and academics looking at appraisal have increasingly come to suggest that Dell (and its progeny to come) may be moving appraisal more towards the realm of fiduciary duty litigation than before.

*** The content of this post is contributed by Conyers Dill & Pearman’s Cayman Office.  We thank Ben Hobden, Erik Bodden and the entire Conyers team for their contribution.  Lowenstein Sandler does not practice in the Cayman Islands.

In In the matter of Trina Solar Limited*, the Grand Court had at first instance refused an interlocutory application made by a group of dissenting shareholders (the “Dissenters”) for worldwide freezing orders over the assets of the company in question pending the outcome of fair value appraisal proceedings, commenced pursuant to section 238 of the Cayman Islands Companies Law.  The Dissenters had applied to the Grand Court because the company had agreed to transfer many of its assets in its subsidiaries to other companies in China, ostensibly to progress the company’s post-merger restructuring. While the Dissenters had received an interim payment from the company following a separate application to the Grand Court, the Dissenters argued that the company’s actions would have the effect of significantly reducing the assets of the company so that it would ultimately be impossible for the company to satisfy in full any judgment of the Grand Court following the substantive trial.  The Grand Court declined to grant the injunction.

Unhappy with the Grand Court’s decision, the Dissenters took their case on to the Cayman Islands Court of Appeal (the “CICA”) which, while finding that the Dissenters had crossed the “jurisdictional threshold” so as to be entitled to ask for the grant of an injunction on the terms they had sought, determined that the company’s evidence had proved the transactions in question were not undertaken for less than proper consideration or on terms that were prejudicial to the company. Further, the fact that the company had made a provision for payment to the Dissenters, based on a realistic assessment of the company’s liability to the Dissenters, was enough to avoid the need for an injunction. The CICA held that the provision made by the company did not need to be for the full amount claimed by the Dissenters with reference to their expert advice, but a “reasonable and prudent provision” made after taking advice from legal and valuation advisers and with the company “forming a balanced and cautious view of the risks of the litigation”. No injunction was granted by the CICA, but the decision remains a helpful guide to companies facing similar litigation.

* CICA 26 of 2017 (unreported, 9 February 2018)

Gregory V. Varallo of Richards Layton & Finger, P.A. discusses takeaways from the “The Continuing Impact of Appraisal Rights” panel at the 30th annual Tulane Corporate Institute. At the two-day series of panels on Delaware corporate law and M&A deal making, which took place on March 15-16 in New Orleans, appraisal rights remained a hot topic.

In this post by Professor Afra Afsharipour of the UC Davis School of Law, she discussed what she identifies as the bidder overpayment problem, where bidders often pay more for publicly traded targets due to managerial agency costs and behavioral biases. The article notes that there are less monitoring mechanisms for bidder shareholders than there are for target shareholders to ensure a fair price. For instance, while target shareholders can bring appraisal proceedings in some transactions, bidder shareholders do not receive any appraisal rights even in transactions where they have the right to vote. The author ultimately argues for a “shareholder voice in situations of high importance to firm value and share price.”