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Dell Inc.

Dole Food Company, Inc.

 

 

RECONSIDERATION OF APPRAISAL RIGHTS

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:

December 21, 2017 Forum Report

 Reconsidering Appraisal Rights for Long Term Value Realization

 

 

 

Forum distribution:

Funds attracted to appraisal rights for speculation instead of investment in intrinsic value

 

For the study of court valuations of appraisal cases referenced in the article below, see

  • September 9, 2013, Jeremy D. Anderson, Erin C. E. Battersby and José P. Sierra of Fish & Richardson P.C., memorandum to Dell Valuation Trust: Delaware Appraisal of Fair Value for Standalone Buyouts (4 pages, 72 KB, in PDF format), summarized in September 10, 2013 New York Times DealBook: "Icahn’s Last Chance on Dell" and September 10, 2013 Forum Report: Court Rules for Appraisal: Fair Value = Intrinsic Value

The other referenced study of appraisal rights patterns by Charles R. Korsmo, Assistant Professor of Law at Case Western Reserve University Law School, and Minor Myers, Associate Professor of Law at Brooklyn Law School, was previously posted but withdrawn by its authors pending draft revisions. A revised draft was made available shortly after the authors posted the following summary of their findings, and is available from a link above the following posting:

  • May 12, 2014, Charles Korsmo of Case Western Reserve University School of Law and Minor Myers of Brooklyn Law School posting in Columbia Law School CLS Blue Sky Blog: "Appraisal Arbitrage and the Future of Public Company M&A"  [Analysis of recently increased investment in appraisal rights]

 

Source: The Wall Street Journal, April 13, 2014 article

THE WALL STREET JOURNAL.  |  MARKETS


Markets

Hedge Funds Wield Risky Legal Ploy to Milk Buyouts

 

By Liz Hoffman

April 13, 2014 7:47 p.m. ET

When Dole Food Co. sold itself last year to its founder for $1.2 billion, many market watchers saw just another in a string of buyouts.

A few investors saw an opportunity to squeeze the buyers for potentially millions of dollars more, using an arcane—but increasingly popular—legal process known as appraisal.
Merion Capital LP bought 7.5 million shares of the fruit company in the days before Dole's October stockholder meeting. It rejected the $13.50-a-share deal price and, alongside three other hedge funds, is seeking more in court through appraisal.

Dole's buyout highlights the rise of "appraisal arbitrage," in which hedge funds buy shares of companies on the brink of a buyout and ask a judge to award them a higher price. These lawsuits have risen sharply as a growing group of investors looks to extract more money from corporate takeovers.

Some have won big, but risks lurk in the strategy's popularity, industry participants say. As more investors chase appraisals, they risk toppling the very deals on which they are trying to profit. That is because appraisal-seekers must abstain or vote "no" on a deal. Dole's buyout passed with just 50.9% of the vote after the four hedge funds, holding 17 million shares, positioned themselves for an appraisal claim. The litigation is pending.

"People are waking up to the idea that there is a lot of money to be made," said Kevin Abrams, a lawyer who has worked on both sides of these cases. "But it's not for the faint of heart. There are risks at every step."

Above, a picker for Dole Foods, which was the subject of an appraisal. Bloomberg News

In an appraisal case, dissenting stockholders ask a judge to determine the fair value of their shares after a deal closes. The judge weighs expert valuations and decides on a number, which is binding on the company and shareholders.

Appraisal claims were brought on 17% of takeovers of Delaware companies in 2013, the most since at least 2004, according to a coming study from Brooklyn Law School and Case Western Reserve University. Based on deal prices, those claims were valued at $1.5 billion, an eightfold increase from 2012.

So far this year, at least 20 appraisal claims have been filed in Delaware court, compared with 28 in all of 2013, according to a Wall Street Journal review of court filings.

About 81% of Delaware appraisals that went to trial since 1993 have yielded higher prices, according to law firm Fish & Richardson PC, which has represented shareholders in appraisals. In an extreme case, a judge in 2004 awarded dissenting stockholders of Coleman Co. $32.35 a share, five years after the company was sold for $5.83 a share.

Shareholders also get backdated interest on their claims, whether they win or not; the current rate is about 5.75% annually.

The risk of a big payout prompts many companies to settle with the shareholders seeking appraisal. "Having to come back and pay 10 million shares three times the deal price isn't a very attractive option, especially for a company that's taken on debt in the deal," said Carl Sanchez of law firm Paul Hastings LLP.

Settlement amounts vary and are confidential, but lawyers and investors say double-digit per-share price bumps are common.

Verition Fund Management LLC has averaged about 30% annualized returns on its appraisal lawsuits, which include a settled case last year over Carlyle Group LP-led buyout of Duff & Phelps Corp., according to a person familiar with the fund's performance.

Merion has averaged an 18.5% annualized return across five completed appraisals, four of which settled, according to documents reviewed by The Wall Street Journal.

Merion looks for deals that it feels are undervalued by at least 30% and focuses on management-led buyouts, said founder Andrew Barroway. Court filings show the five-year-old firm has nearly $700 million tied up in four pending appraisals, including $352 million in BMC Software Inc., which was sold last summer to private-equity firms Bain Capital and Golden Gate Capital.

"The vast majority of deals are fair. We're looking for the outliers," Mr. Barroway said.

Another big player is Ohio-based Ancora Advisors LLC, which has filed more than 30 appraisal claims since 2004, court filings show.

The strategy has drawn newcomers. Fortress Investment Group LLC, a buyer of troubled corporate debt, is seeking appraisal on $40 million worth of Dole shares, according to people familiar with the matter.

And new money is flowing in. Ancora recently raised $50 million dedicated to appraisals, Managing Director Brian Hopkins said. Verition last month launched a fundraising effort targeting $250 million, a person familiar with the matter said. New York-based Muirfield Capital Management LLC is hoping to raise $100 million or more, according to a person close to the fund.

"Word is getting out," said Matthew Giffuni, managing partner of Quadre Investments, which has brought 11 appraisal lawsuits since 2010.

Still, the strategy can backfire. A judge can award less than the deal price. In 2007, hedge fund Highfields Capital Management LP turned down a $31-a-share bid for its stock in MONY Group Inc., only to have a judge decide the shares were worth $24.97 apiece.

Even successful appraisals can take years to resolve. The Technicolor case, in which shareholders challenged Ronald Perelman's 1983 buyout of the movie-production company, took 22 years. The strategy's growing popularity may also be increasing its risk. In addition to Dole's razor-thin margin, the sale of Cornerstone Therapeutics Inc., another deal that has attracted arbitrageurs, got just 50.2% of relevant votes in February. A failed vote would have wiped out the funds' appraisals rights and likely caused the price of their shares to fall sharply.

"The concern is that [the strategy] becomes a victim of its own success," Mr. Hopkins of Ancora said.

Write to Liz Hoffman at liz.hoffman@wsj.com

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