The Delaware Supreme Court issued a
ruling on December 14, 2017 that endorsed its interpretation of the "Efficient
Market Hypothesis" as a foundation for relying upon market pricing
to define a company’s “fair value” in appraisal proceedings. The
Forum accordingly reported that it would resume
support of marketplace processes instead of judicial appraisal
for its participants' realization of intrinsic value in
opportunistically priced but carefully negotiated buyouts. See:
Shareholder right to appraised fair value now considered form of
Note: The article below confuses
the legal valuation standards for appraisal rights, which are based on the
"fair value" of a company rather than on the "fair pricing" of a
transaction that is the subject of more common class action litigation
claims asserting breaches of director duties to properly manage a sale.
For an authoritative legal review of shareholder rights to realize the
long term intrinsic value of an investment as an alternative to market
The aftermath of the
management buyout is showing that the new, new thing on Wall Street is
appraisal rights. The battle being waged by hedge funds over appraisal
rights in the Dole buyout just may be the tipping point, as hundreds
of millions of dollars flow to the funds to pursue these actions.
Appraisal rights actions, according to a new paper by two law professors,
Minor Myers of Brooklyn Law School and Charles Korsmo of Case Western
Reserve Law School, are already skyrocketing in value. Last year, the value
of appraisal claims was $1.5 billion, a tenfold increase from 2004. More
than 15 percent of takeover transactions in 2013, the paper said, were
subject to claims over appraisal rights.
So what are appraisal rights, you ask?
Shareholders sometimes have appraisal rights when the company they own stock
in is acquired and they think the price is too low. Shareholders can ask a
court to assess the fair value of their shares, with the hope that the court
will agree that the price is not high enough and require that the
shareholders be paid more.
Appraisal rights are protection for shareholders. If they think the takeover
is a poor deal, they can seek a better price in court. Appraisal rights also
serve to remind the buyer not to try to underpay. This is a particular
problem in management buyouts, which have an air of “inside deal.”
If you followed the $24.9 billion management buyout of Dell, you may have
read about the campaign by the activist investor
Carl C. Icahn to
get other shareholders to exercise their appraisal rights. The campaign
fizzled for most shareholders, and even Mr. Icahn decided not to pursue his
appraisal rights. This is because appraisal rights are not typically seen as
a great remedy for the average shareholder. Shareholders have to pay their
own legal fees and, depending on the state where the company is organized,
the court can actually award less than the amount in the takeover.
In the Dell case, given that the company looked for other buyers and none
came along, appraisal rights did not turn out to be a good option for most
shareholders. It appeared that management’s price was probably as much as
Dell could get in a sale, given its declining personal computer business.
Still, about 2.7 percent of shareholders exercised appraisal rights,
including T. Rowe Price.
It turns out, though, that the Dell campaign was a small step in a much
larger fight, the one involving Dole Food.
Dole was involved in a management buyout last fall. The company was
controlled by its buyer, David H. Murdock, its 90-year-old chief executive
and chairman. The offer price of $13.50 a share was
viewed by analysts and even
some shareholders as underwhelming. At least one analyst put
Dole’s fair value at $17.50 a share, and shareholder litigation disclosed
that Dole had valued itself for lenders at more than $20 a share.
A few years back, this would have been the end of it. There is litigation
pending, but its outcome is uncertain. And let’s face it, investors raised
similar questions about the J. Crew sale to two
private equity owners,
and J. Crew and its new owners eventually
settled a shareholder suit
for $16 million. Now, the owners of the preppy clothing company
reported to be in
preliminary talks with the Japanese retailer Uniqlo to sell the
company at double the price they paid only a few years earlier.
In the wake of the Dole buyout announcement, four hedge funds —
Fortress Investment Group,
Hudson Bay Capital Management, Magnetar Capital and Merion Capital Group —
bought about 14 million shares. They have now exercised their appraisal
The hedge funds are all players in the appraisal game. Magnetar is still
dissenting in the Dell case. Merion has filed at least 10 appraisal actions
in Delaware, including two challenging the acquisitions of Ancestry.com and
BMC Software. Merion is run by a former plaintiffs’ lawyer, Andrew Barroway,
who used to be with Kessler Topaz Meltzer & Check, which
won a $2 billion judgment
against Southern Peru Copper, the largest award of all time in Delaware.
In all, about 25 percent of Dole’s public shareholders have exercised their
Appraisal rights are risky and expensive, but they also have benefits for a
hedge fund with a lot of money. One of the big benefits is that shareholders
entitled to statutory
interest on the appraisal award at the Fed discount rate plus 5
percent from the time the deal is closed until the award is paid. The Fed
discount rate is at 0.75 percent, meaning that the interest rate is 5.7
percent. In this market, that is a good return if you expect to at least get
the merger price.
Buying shares and then filing for its appraisal right is also a good place
for a hedge fund to park cash it may want to spend elsewhere. This has all
been spurred by an earlier paper on the subject by Professors Korsmo and
Myers, who found that there were significant returns to appraisal rights in
As a result, new hedge funds are specializing in appraisal rights. Merion
has reportedly raised $1 billion. Another hedge fund, Patchin Value Master
Onshore, specializes in filing small appraisal claims for $1.5 million of
stock and had filed 16 such actions as of the end of 2013. Conferences are
being held that
focus solely on encouraging
appraisal rights. All of this is driven by the fact that hedge
funds are looking for new business outside the mainstream activist sphere.
The Dole appraisal rights battle is also a huge development in takeovers.
Buyers can underprice their takeovers, but they are left with the “Dole
problem” — the fruit and vegetable producer now has a potential liability
that starts at about $190 million, the value of the stock exercising
appraisal rights. Its opponents are hedge funds that will not go away
lightly. They are going to litigate hard and will need to earn a return.
As a result, the battle over Dole will no doubt make others pursuing
management buyouts hesitate before they act.
For now, though, appraisal rights are primarily benefiting the hedge funds.
Institutions and individual shareholders are unlikely to plunge in full
force, even if
T. Rowe Price
did so in the Dell campaign.
The question is whether there will be any pushback by companies. We are
about to see many more actively litigated appraisal cases in the coming
years. There will be complaints by corporations that the hedge funds are
simply out to make easy money. Companies may lobby to make appraisal rights
even harder to exercise to discourage the hedge funds.
Still, in fights over appraisal rights, you have real players putting their
own money on the line. Not all shareholders are going to exercise their
appraisal rights, but this is the way to make sure that the future
management buyouts are not the Doles of the world, paying an underwhelming
price. In other words, this may be the way that shareholders finally assert
their power. You can thank the hedge funds for that.
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