M&A Law Prof Blog says no.

In short, the market out exception (at least in Delaware) provides that a shareholder does not have appraisal rights if they are receiving stock and not cash for their shares in the target company. M&A Law Prof Blog compares the current state of appraisal (including the market out exception) with the premise that appraisal came about at a time when mergers were generally for stock, and thus appraisal gave one the ability to force (via appraisal) cash consideration instead of stock. The opposite of how the market out exception works today.

On October 18, 2018, Stafford Publishing is offering a webinar covering developments in Delaware law, including appraisal.  2017 saw numerous appraisal decisions (many of which we have covered) and movement in both the strategy and practice of appraisal.  With a panel of Delaware attorneys well versed in appraisal as well as fiduciary duty litigation, the webinar will cover developments in Delaware law affecting mergers.

In appraisal, across the majority of states–and those countries we have reviewed–the main question is the “fair value” of a petitioner’s shares. Some courts and commentators have mixed “fair value” with a similar but economically distinct term: “fair market value.” But even if everyone agrees on what fair value means, that does not mean the law is uniform as to when fair value is being calculated. Consider: Delaware law tasks the court with determining the fair value of the shares as of the merger date. At the other end of the spectrum, California law requires a court to determine the fair value of shares immediately prior to the announcement of the merger. Two states’ laws thus deal with certain eventualities in very different ways. What if the deal takes a long time to close? For California, this makes no difference; the “interim events” between announcement and closing do not come into the analysis. But for Delaware, interim events can have great significance–just because management has struck a deal (including a price) months, sometimes many months, before closing does not mean that that price reflects the value of the company at closing. As an example, imagine an early-stage biotech company or a speculative gold miner. Deal price may be set and a shareholder vote taken; then the company receives FDA approval or a claim pans out, and at closing, the buyer receives the benefit of the increased value while shareholders do not. In larger deals, where numerous regulatory hurdles need to be cleared, the difference in the date of the fair value measure can mean the difference in measuring during a positive or a negative business cycle. So in any appraisal action, the “when” of fair value matters.

While appraisal is typically a creature of statute, appraisal rights can also be a creature of contract–in particular, when an operating agreement, charter, or similar foundational document provides for them (including when a certificate of designation provides for the value of preferred stock). Many states, including New York, allow the members of an LLC–as an example–to include appraisal rights in the operating agreement. While we often cover appraisal on this blog as a statutory remedy focused on shareholder protection, negotiated appraisal rights can be a part of a corporate lawyer’s suggestion box in trying to get a deal done. A minority investor concerned about his or her minority status may be comforted by an appraisal rights mechanism in the foundational documents. Similarly, an investor who is contemplating a minority investment may wish to negotiate for an appraisal provision precisely because it can give an “out”–and, at minimum, bargaining power–if the minority investor sees issues with an otherwise-aboveboard merger. Because appraisal rights are different than breach of fiduciary duty claims and are a post-closing remedy, the minority investor can also point out that appraisal may be a viable remedy in lieu of filing a lawsuit seeking injunctive relief and attempting to block corporate action. This trade–giving up some rights before the closing in exchange for a post-closing remedy–allows the minority and majority investors to protect themselves while potentially creating value for both in the transaction.

Yes. At least according to this extensive comparative analysis of U.S., French, and Romanian law in the University of Pennsylvania Journal of Business of Law (France has appraisal too, but that’s for another post). While obviously a small market and not known for its presence on the global capital markets stage, Romania has an apparently robust appraisal regime, allowing dissenting shareholders to dissent from a variety of corporate actions, demand repurchase of shares, and have an independent expert assess those shares. The independent expert portion is particularly different from U.S. (including Delaware) litigation, which often sees dueling experts, each with its own valuation models and assumptions. But independent, or at least court-appointed, experts at times do make an appearance in appraisal jurisprudence. Delaware chancellors have considered appointing independent experts to assist them in appraisal, and courts in other states have done so, as well.

Loeb Smith, a law firm with a Cayman office, provides this update on dissenters’ rights in the Cayman Islands, focusing on recent developments in interim payments. In reviewing the landscape of investor strategies regarding Cayman mergers, Loeb Smith also notes–as we have written about previously–“Information can also be disclosed during court proceedings for a judicial determination of the ‘fair value’ that could later lead to a securities class action in a US court or other jurisdiction where the target company was listed.” Indeed, this is true in not just Cayman appraisal but also in any appraisal action. Although recently dismissed on statute-of-limitations grounds, a securities action against Towers Watson had previously been proceeding based in part on information gained in the Delaware appraisal.

What do companies need to include in appraisal notices? According to a recent analysis piece in Law360 [$$$], more than they currently disclose.  Analyzing a July 2018 opinion by Chancellor Bouchard – Cirillo Family Trust v. Moezinia, No. 10116-CB – the authors of this piece discuss that “merely providing notice of a merger and the existence of appraisal rights is not sufficient” in an appraisal notice. The notice must provide information allowing stockholders to make an informed decision on whether to “accept the merger consideration or to seek appraisal.” The authors, citing Cirillo, suggest that at minimum notices should include “information regarding (1) the background and terms of the merger, (2) the value of the constituent corporations, (3) the board’s decision-making process, and (4) potential conflicts of interest.”

This list of factors appears consistent with the current case law. As appraisal jurisprudence has made clear, conflicts and board deliberations go to the “process” portion of what some commentators have viewed as a sliding scale of deference to merger price. But if a stockholder is forced to make a decision on appraisal without full and fair information on process, it may be impossible – or at least incredibly difficult – for the stockholder to decide whether fair value is being achieved.

The notice in Cirillo was found to be “clearly” legally deficient. “The notice did not include any of DAVA’s financial information, any description of DAVA’s business or its future prospects, or any information about how the merger price was determined or whether the price was fair to stockholders.” But even with such a deficient notice – what remedy is there for a deficient appraisal notice? That’s somewhat unclear. Cirillo was a breach of fiduciary case, and the Court dismissed the breach of fiduciary claim with leave to replead. But other cases we have seen suggest that a quasi-appraisal remedy (again, attached to a breach of fiduciary claim) may be part of the answer. An inadequate appraisal notice may excuse a stockholder’s untimely attempt to assert appraisal via the quasi-appraisal remedy, or provide ammunition for the argument that the quasi-appraisal remedy is most appropriate because only via discovery can the stockholder get the information they were entitled to in the original (deficient) appraisal notice.

As we continue to see more litigation involving the notice process, the authors’ suggestion that issuing good, legally compliant appraisal notices is of increasing importance seems consistent with Delaware jurisprudence.

For a free version of this article (published subsequently), see the Harvard Law Forum on Corporate Governance.