We posted earlier this week regarding a white paper written by the Council of the Corporation Law Section of the Delaware state bar, which was issued alongside the Council’s proposed amendments to Delaware’s appraisal statute. The Council had considered amendments to address the practice of appraisal arbitrage, but ultimately did not make any recommendations to eliminate or limit that practice. One reason the Council decided not to act to curtail appraisal arbitrage is that it perceived certain concerns expressed over the negative effects of arbitrage to be overblown, as the Council reviewed data from studies of appraisal arbitrage that did not indicate a material uptick in speculative or frivolous appraisal litigation. The following additional findings from the white paper further explain why the Council has suggested that the Delaware legislature not hinder appraisal arbitrage:
- Default fiduciary duties may not suffice to ensure that merger prices reflect the fair value of a target company’s shares, especially in deals such as buyouts by a controlling stockholder and other transactions that are not subject to a market check. In light of the fact that appraisal is a necessary remedy to protect shareholders, it would be much less effective if the appraisal statute were amended to curtail the ability to transfer that right. The law generally looks favorably on the assignment of financial claims, and there is no principled basis to depart from that position in the appraisal context.
- Appraisal actions tend to target two species of deals: conflict transactions and those involving questionable pricing. In both of these instances, which in the Council’s words have “a greater potential for unfairness,” the appraisal award is often a premium (significant, in many cases) to the merger price.
- “Appraisal cases attacking the merger consideration in non-conflict transactions are fewer in number and often result in appraisal results below or near the merger consideration.”
- “To the extent that the buyer in a merger has concern about an increased number of merger claimants and the overall cost of the transaction, the buyer can negotiate an appraisal-out condition (e.g., a right not to close the merger if more than a specified percentage of shareholders dissent and demand appraisal). The fact that such appraisal-out conditions remain fairly rare suggests that the availability of appraisal arbitrage is not a significant factor in the market.”
At least one commentator who represented the respondent in the Ancestry.com case and who had (unsuccessfully) requested the Chancery Court to disallow arbitrage in that case has been extremely critical of the Council’s determination not to limit appraisal arbitrage. We will continue to monitor developments in the state legislature and report on the assembly’s reaction to the Council’s proposal.