A recurring topic in appraisal litigation (and merger litigation more generally) is that potential buyers, and in particular those who are most engaged with the company get a “look under the hood” that general investors do not.  But this simplistic analogy may actually understate the informational advantage of a buyer compared to the market at large.  Shareholders often are left in the dark – until a merger is announced, often as a fait accompli – as to possible conflicts, as to side deals made between a buyer and the board, or as to other potential buyers the board has either not considered or cast aside.

One answer to the informational asymmetry, proposed in “A Governance Solution to Prevent the Destruction of Shareholder Value in M&A Transactions” by Stephen Weiss, is to appoint an independent monitor, who acts on behalf of the shareholders themselves, able to observe and report on corporate governance and Board actions.  While one could consider the appointment of a monitor in a number of scenarios, we focus on its application to a merger.  The article suggests that an independent monitor (defined by a lack of relationship with the Board, the buyer, and the company) could both protect shareholders against Board actions against their interest, but also protect Boards against merger-related litigation challenging parts of the merger.  In the context of appraisal, an independent monitor could act to review the deal process and make (effectively live) comment on whether the deal process is Dell-compliant.

A monitor is one of many potential ideas being floated to alter the merger process (such as blockchain solutions, which we have covered before), seeking to make the process fairer and more efficient.

From Deallawyers.com, observing that the decision can be read as a pretty direct rebuke to the lower Court, and focusing on the Delaware Supreme Court’s finding that the lower court decision appeared “results-oriented.”

From Bloomberg Law, arguing that Aruba harms appraisal arbitrage (despite rejecting unaffected stock price), but concluding that “ . . . the court’s decision, which narrowly applied to the facts in the Aruba case, raises questions because it doesn’t settle the dispute on how much weight to give the market price” and “. . . raises questions about when and where to use them, or what kind of evidence is needed[.]”

From Business LawProf Blog, discussing how Aruba fits with Dell and DFC in how one figures out what the real purpose of the remedy is.

From Reuters, on how Aruba may hurt appraisal arbitrage.

“Appraisal after Dell” by Professor Guhan Subramanian has been published in the book “The Corporate Contract in Changing Times: Is the Law Keeping up?”  While the book covers a number of topics in recent corporate law, including challenges to Delaware primacy, activism, and disclosure-only settlements with respect to mergers, it also covers the oft-changing world of appraisal via Professor Subramanian’s article.  In “Appraisal after Dell” the Professor argues that Dell and other recent cases have swung the appraisal “pendulum” towards deal price.  Of perhaps more interest to practitioners and investors are the implications the Professor sees from Dell and recent cases: the creation of a “tactical choice” for sell-side boards to either have a “good” (i.e., Dell compliant) deal process, or the added risk of post-closing appraisal challenges – with the dissemination of Dell-compliant deal processes a slow process unless appraisal remains a meaningful remedy.  The Professor also examines the implications of the “who decides” aspect of the Dell decision – arguing that Chancery Court judges will seek to appeal-proof their decisions by finding possibly false clarity in otherwise shades-of-grey deal processes.  We note that the Professor was the expert for Dell in their appraisal case and has written on this topic before.

The article (and book more generally) set out a useful recounting of the potential questions remaining post-Dell.  But with the caselaw changing as fast as it is, no doubt yet additional academic commentary will be needed in the future.

JDSupra has published an article discussing recent valuation issues in five states: Louisiana, Georgia, West Virginia, Alaska, and Pennsylvania.

While each decision covered is worth discussion in its own right, a comparative analysis of this kind lends itself to highlighting the similarities and differences between the states.  In particular, how (and if) each state applies various discounts, including discounts for lack of marketability and minority discounts varies.  Thus, as an example, the Louisiana case highlighted explicitly disallowed marketability and minority discounts (commensurate with Louisiana law); in the West Virginia case, a juries rejection of marketability and minority discounts was sustained, but the door was at least open to a jury adopting such discounts in another case.  And in the Georgia case, it was the wording of the contract, along with the policy expressed in Georgia’s appraisal regime, that led the Court to uphold a decision providing no minority discount in that case.

Whether to apply minority, marketability, or similar discounts in an appraisal valuation is a critical topic in numerous appraisal jurisdictions – including ones we have covered previously like Iowa, Arizona, and the Cayman Islands.  Analysis of discounts can sometimes receive short-shrift in the broader world of appraisal as Delaware does not allow for a minority discount in appraisal.  Thus, we are often left looking to other states (and sometimes foreign jurisdictions) to understand how different courts treat such discounts in an appraisal proceeding.

In late March, Michigan Law hosted Professor Hidefusa Iida to discuss appraisal rights in Japan.  Professor Iida previously published on appraisal rights in Japan, including in a 2014 article “Reappraising the Role of Appraisal Remedy.” The basics of Japanese appraisal, from Professor Iida’s article and this analysis, are similar to Delaware. Shareholders who dissent from certain major corporate actions, in particular, mergers, can – as in Delaware – demand ‘appraisal’ of their shares, meaning that a Court will fix the “fair value” of the shares. Indeed, before appraisal rights in Delaware became a regular fixture of investor protection, some academics were already looking to Japan as a pro-investor forum, citing appraisal rights as one key facetOther commentary has also viewed the Japanese appraisal remedy as a critical minority shareholder protection (or weapon, as the verbiage may be).

We will continue to cover Japanese appraisal as further items develop.

Business divorce can arise in any privately owned business, often without warning. These can be divisive, long-lasting and expensive—straining both stakeholders and the business.

The business valuator must carefully scrutinize the characteristics in the interest being valued to determine stakeholder equity. This includes reviewing business information and assessing equity risk in order to produce a value conclusion addressing those risk factors.

Discounts may apply in some situations. Valuation discounts are essentially the difference between fair value and fair market value.  Discount applicability in a business divorce matters varies by state and alleged action.

The two main discounts considered in a business divorce engagement are a (1) discount for lack of control (DLOC); and (2) discount for lack of marketability (DLOM).

A DLOC is a reduction in an entity’s equity interest value due to a stakeholder’s lack of ability to exercise control. The value of an equity interest for a stakeholder in a minority position should have less monetary value than one with majority control.

A DLOC considers the benefits of control not available to a stakeholder’s minority equity ownership position and generally includes the ability to:

  • Change or appoint management.
  • Change the bylaws and articles of incorporation.
  • Influence and control the board.
  • Control management compensation.
  • Sell, recapitalize or liquidate the company.
  • Declare/pay shareholder dividends.
  • Lease, liquidate or acquire business assets.
  • Influence the company’s course of business.
  • Sell the entity.

A DLOM is a reduction in an entity’s equity interest value due to a stakeholders’ inability to convert or sell their interest quickly and with amount certainty. When quantifying a DLOM, the business valuator must understand the impact of these company characteristics:

  • If the equity interest is private or publicly owned.
  • Financial condition per the financial statements.
  • Dividend-paying policy and history.
  • Nature of the company, its history, industry position and economic outlook.
  • Control implicit in interest to be transferred.
  • Management depth and quality.
  • Restrictions on interest transferability.
  • Interest holding period.
  • IPO costs.

For both DLOCs and DLOMs, business valuators use various empirical studies to support the discounts chosen. Ultimately, business valuations are an estimate of value at point in time. They are based on information provided by both parties along with external and market sources. Therefore, if you choose not to retain a qualified professional to help with the business valuation process, you do so at your own peril.

** Lowenstein Sandler LLP thanks Hubert Klein of EisnerAmper LLP for his contribution to this blog. You can find more on Mr. Klein’s practice here.