some high-level explanation and comment about appraisal rights.
set forth the basics on how they work, identify some recent
developments, and highlight the generally positive financial results
from demanding appraisals. Others have written much better and more
extensively than we could, so we provide some references and links
to the best sources.
Appraisal Rights Work
investor in a Delaware corporation does not like the price that an
acquirer pays for a portfolio company, then he or she can appeal to
the Delaware courts for an independent appraisal. Other states
provide for similar appraisal rights, but as with so many other
Delaware law (Section 262)
merits the most attention.
like a great idea. Yet, the court can decide that the buyer paid too
much, rather than too little. So, the investor bears some risk that
they will receive less than the price paid to other shareholders.
need to mind some other elements:
can seek appraisal only for cash deals (or for deals in which the
buyers pays with non-public shares), so (for example) the proposed
Valeant-Allergan deal would not qualify since Valeant has offered
its own shares
applies to full sale or mergers only, not asset sales, sale of a
also need to:
appraisal before the vote on the deal
against the deal and refuse the consideration, so you can’t vote for
the deal, take the cash, then demand appraisal
pay all his or her own legal fees, so appraisal actions differ from
shareholder class-action matters.
proceeding can take years, with intricate, mind-numbing procedure.
appraisal rights apply only to transactions that actually close, so
only a small number of deals even qualify in a given year. A recent
comprehensive research effort
notes that in 2013, investors demanded appraisal on 28 deals, or
about 17% of eligible deals in the year. That paper also has much
more about the legal and financial underpinnings of appraisal rights
cases, and is worth a close read.
Much of the
current attention on appraisal rights stems from the Dell
privatization in 2013. Then, investors (including Carl Icahn and
Southeastern Asset Management) challenged the price Michael Dell and
private equity investors paid to take Dell private. The Shareholder
Forum provides a
thorough account of that
saga, with numerous useful legal and media references.
appraisal rights have led to a sort of new asset class - appraisal
arbitrage. Similar to merger arbitrage, some asset managers have
begun to acquire stakes in companies subject to appraisal demands,
looking for that higher share price. Investors can do that because
they may demand an appraisal even if they acquire shares after the
record date for voting on the merger. As long as the seller of those
shares votes against the merger and refuses the deal consideration,
the acquirer can use those shares to demand an appraisal.
research paper noted earlier highlights seven funds that have
undertaken multiple appraisal arbitrage trades. One fund, Merion
Capital, raised capital for these trades, has invested in seven such
deals since 2010, and may have also tripped up on a legal
technicality analyzed in a
New York Times article.
From Demanding Appraisals
demands generally deliver decent returns. The cited research paper
estimates that on average, the Delaware courts increased the
purchase price by about 50% relative to what investors would have
analysis of nine more recent deals, Fried Frank
estimates that on average,
buyers received 45% more from sellers after appraisal. This, too, is
a superb legal memo exploring the nuances of appraisal rights.
deals, then, appraisal rights provide another way for investors to
influence corporate leadership, and is worth investigating.