We posted last week about new legislative amendments to the appraisal remedy proposed by the Council of the Corporation Law Section of the Delaware state bar association, an influential group of Delaware lawyers. The amendments were accompanied by an explanatory white paper explaining the rationale behind those recommendations that the Council made, and of note, those it did not make. In particular, the Council did not advance a proposal to limit or eliminate outright appraisal arbitrage. We have posted previously about so-called appraisal arbitrage, in which professional investors purchase shares ‒ with attendant appraisal rights ‒ after the terms of a merger are announced but before the deal closes. See here, here, and here.
By way of background, the Council had created a subcommittee in February 2014 to consider the desirability of amendments to the appraisal statute. As the Council’s report explained, the very creation of the subcommittee arose in part because of the increasing use of appraisal arbitrage and resultant commentary as to whether arbitrage was consistent with the intended purpose of the appraisal statute. As the Council further reported, several considerations led the subcommittee to recommend, and the Council to conclude, that the appraisal statute should not limit appraisal rights to shares held before the public announcement of a proposed transaction. In specific, the Council found that appraisal arbitrage is not contrary to the “balance” envisioned by the Delaware appraisal remedy, which the Council identified to be “the ability of corporations to engage in desirable value enhancing transactions and the ability of dissenting stockholders to receive fair value for their holdings.” One of the primary factors behind this finding was the Council’s determination that appraisal arbitrage ‒ and appraisal litigation more generally ‒ does not encourage frivolous litigation. As the Council found: “Unlike the case of representative litigation, which occurs in more than 90% of the public mergers and consolidations, only 17% of the appraisal eligible transactions during 2013 resulted in appraisal litigation in Delaware.”
We will post some additional highlights from the Council’s report later this week.