We have blogged before about the purported “friend of the court” brief that a group of law professors would like to file with the Delaware Supreme Court, urging the Court to reverse the Chancery Court’s ruling awarding DFC Global stockholders a premium to the merger price.

The stockholders have now filed their own brief opposing the academics’ proposed submission.  They deride the professors as “interlopers” pursuing an “academic fantasy” and attack the proposed amicus brief as a mere regurgitation of DFC Global’s argument that the Chancery Court should defer to the merger price as the sole indication of fair value when that transaction price was purportedly the product of a pristine, arm’s-length auction process.

In particular, the stockholders argue that the academics should not be heard because they have no direct interest in the outcome of the appeal; their arguments repeat what DFC Global already said in its appellate brief; and, they exaggerate the impact of the Chancery Court’s opinion on the M&A market, while attempting to insert new facts and assertions into the case that were not included in the record evidence adduced at trial.

The Supreme Court has not yet ruled on whether it will accept the amicus brief or not; we will continue to monitor this appeal for further filings and rulings.

We posted earlier this week about DFC Global’s appeal to the Delaware Supreme Court, challenging Chancellor Bouchard’s award to stockholders of a premium over merger price.  Yesterday, a group of law and corporate finance professors from various universities moved the Supreme Court to allow them to file so-called amici curiae briefs as non-party “friends of the court” who opine on the case.  As set forth in their proposed brief, these academics intend to urge the Supreme Court to defer to the transaction price when it was reached as a result of an arm’s-length auction process.

If the Supreme Court allows the professors to file their brief, then the stockholders have a chance to respond, as do other non-party friends of the court who believe that Chancellor Bouchard’s opinion was correctly decided and that merger price should not be deferred to or otherwise awarded presumptive or conclusive weight in appraisal cases.

Update: See Bloomberg’s January 4, 2017, coverage of the Professors’ brief here.

We’ve posted before about the DFC Global decision, in which Chancellor Bouchard awarded a 7% premium over merger price, and then further increased that uplift by 9 cents in a ruling on reconsideration.  That ruling is now on appeal to the Delaware Supreme Court, and the appellant’s brief was submitted last week.

As reported in Law360, DFC Global has argued to the Supreme Court that the lower court’s decision “undermines confidence in Delaware appraisal actions.”  The Delaware Supreme Court has not heard an appraisal case since its February 2015 ruling in CKx; their ruling in this case will be closely watched.

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Do stockholders as a group lose something when the appraisal remedy is weakened, perhaps overly so?  And should something be done about it?  Is there social utility in appraisal arbitrageurs testing merger prices, such as by keeping buyers and sellers honest in what may otherwise be a rather unfair market?

These questions are addressed, along with a policy (legislative) prescription in the 2020 article: Protecting the Social Utility of Appraisal Arbitrage: A Case for Amending Delaware Law to Strengthen the Appraisal Remedy after Dell by Thomas Meriam.*

Starting from the no-doubt accurate premise that “the appraisal remedy [has perhaps become] the most divisive and contentiously debated issue in Delaware corporate law” – the article first sets out to describe the Dell case (which we have written about extensively) and the fallout that has resulted since.

The empirics are straightforward: appraisal activity, at least public appraisal activity involving public companies in Delaware, has fallen since a surge in the mid-2010s.  And tracing that back to Dell and progeny is a fair move.

The article criticizes Dell, and more concretely, courts who have considered Dell in inconsistent manners or looked at Dell as an overly simplistic rubric – creating what the article describes as a “merger price deference rule” contrary to the statute and statutory intent.  And another critique follows as well – if the legislature intended appraisal to simply revert to merger price, why have appraisal?

The Article goes on to set out its most fundamental premise: appraisal arbitrage may be “the last line of defense for stockholders.”  Setting out its premises, the article argues: First: fiduciary litigation has been weakened as a result of the rejection (in certain courts) of ‘disclosure-only’ settlements, and – critically – the connected issue that fiduciary duty litigation now generally does not involve discovery, and thus has little chance of finding corporate wrongdoing.  Second: appraisal arbitrage offers a way to police corporate malfeasance.  The article argues that the threat of viable appraisal arbitrage sets a “reservation price” for the firm.  Citing Korsmo and Myers, the article notes that appraisal arbitrage cases generally targeted mergers with “highly negative residual premiums” – put another way: meritorious cases where the selling stockholders were getting ripped off.

With fiduciary litigation less able to ferret out malfeasance, the fall of appraisal arbitrage (per the article), leaves shareholders vulnerable.  The article traces the fall to Dell and DFC Global, but then focuses on the post-Dell cases, applying Dell, such as Aruba Networks, and notes that the short attention the Delaware Supreme Court has given to the reasoning in certain chancery court decisions has left the appraisal arbitrage area with poor precedent – less predictable, and where predictable, predictable only in deference to merger price.

What to do?  If appraisal arbitrage is beneficial to shareholders (and there is certainly evidence appraisal itself is beneficial to shareholders, though that evidence is contested) the article proposed legislative solutions.  In particular, the article suggests adding language to DGCL 262(h) restricting how a court can rely on deal process and deal price, or adding an equitable consideration component.

The article makes an interesting case for legislative changes to strengthen the appraisal remedy.   We would add one further: appraisal started as a compromise, and another compromise seems warranted again now. Stockholders, in exchange for the loss of the unanimity requirement in approving M&A transactions – something surely impossible given the size and complexity of today’s corporations, were given appraisal as a remedy for their lost hold-up power; they would now (re)gain a right that afforded minority shareholders fundamental protections against oppression by the majority (and management).  Appraisal started as a check on the abuses of management and the majority, and, in part, on the idea of resistance to short-termism – and can return to this valuable check in the future.

Weakening appraisal weakens minority shareholder rights because it weakens the threat of appraisal as well.  It weakens the need to consider appraisal in M&A deals, and weakens the disclosure regime that upholds a significant portion of Delaware corporate law and the US securities laws.  Strengthening appraisal may very well, paradoxically, result in fewer successful appraisal claims, as better deals mean better value for shareholders.

Read the entire article here [.pdf].

*Suggested citation: Thomas J. Meriam, Protecting the Social Utility of Appraisal Arbitrage: A Case for Amending Delaware Law to Strengthen the Appraisal Remedy after Dell, 85 Brook. L. Rev. (2020).

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Chancellor Andre G. Bouchard of the Delaware Chancery Court will retire effective April 30, 2021.

Chancellor Bouchard handed down a number of major appraisal decisions during his time on the bench, including Solera, DFC Global, Cirillo Family Trust, and Farmers & Merchants. We covered his appointment in 2014, and his first appraisal opinion back in 2015.

The retiring Chancellor has not indicated his future plans.

See the notice here.

Private vs Public Company - Key Differences Between the Two

While the appraisal landscape, and many of the major appraisal decisions of the past few years, have concerned the appraisal of public companies, it is critical for investors and practitioners to not lose sight of private appraisal.

Appraisal rights can be available to shareholders of privately held corporations, and can be exercised when a private company is taken over.  As an example, shareholders of private company Zoox have demanded appraisal [$$] resulting from Amazon’s purchase of Zoox for about $1.3 billion, arguing that this price was well below what Zoox was valued at in recent rounds of capital raising.

Notably, the same shareholders seeking appraisal had previously sued Zoox under Section 220 of the Delaware General Corporation Law, seeking books and records related to the deal.  As we have noted , appraisal and Section 220 demands are increasingly becoming intertwined as they offer shareholders, especially private company shareholders, one of the only effective remedies to get additional information about deals potentially hostile to their interests, and, for appraisal, one of the only effective remedies for minority shareholders to be properly compensated for their interests.

The Zoox appraisal demand is a reminder that appraisal is a relevant right to far more than just investors pursuing an “appraisal strategy” – private equity firms, startup employees and any other minority shareholder should be aware of their appraisal rights (and other shareholder rights) and protect their interests.  This becomes especially relevant when an investor is considering an investment, and then, when that investment is acquired or engages in another corporate act allowing appraisal.

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.

Legal news site Law360 provides this analysis [$$$] of what has occurred in Delaware law in the third quarter of 2019, including developments in appraisal. As the Delaware courts have grappled with the trio of Delaware Supreme Court decisions impacting appraisal – DFC Global, Dell, and Aruba – the decisions coming from the Chancery courts – some currently being appealed* – continue to both define what factors courts will consider in appraisal proceedings and blur the line between appraisal (at least in instances of appraisal arbitrage) and fiduciary duty litigation, where actual wrongdoing is required.

*RKS attorneys are counsel to petitioners in certain cases mentioned in the Law360 piece.

Chief Justice of the Delaware Supreme Court Leo Strine has announced he will retire this fall. Readers of the blog will recognize that Chief Justice Strine has been involved in numerous appraisal decisions including Aruba and others and has spoken about the appraisal remedy at length.

The Chief Justice was previously a Vice Chancellor, before his elevation to the Delaware Supreme Court.