THE WALL STREET
Judge Rules in Favor of Hedge Fund ‘Appraisal Arbitrage’ Strategy
Merion Capital’s Victory in Fight With Ancestry.com Could Mean
Higher Payouts in Corporate Buyouts
7, 2015 1:15 a.m. ET
Hedge funds looking for higher payouts in corporate
buyouts scored a win this week.
In a case stemming from the 2012 buyout of Ancestry.com
Inc., a judge on Monday ruled shareholder Merion Capital LP didn’t
have to prove it voted its shares against the family-tree website’s
buyout to challenge the deal’s $1.6 billion price tag in court.
The decision keeps open what has become an increasingly
as “appraisal arbitrage”—for these investors: buying up
shares of companies on the cusp of a takeover, opposing the deal and
then seeking more in court in a legal process known as appraisal.
At issue in the Ancestry.com case was whether Merion
could prove its shares weren’t voted in favor of the sale to European
private-equity firm Permira. Appraisal seekers must abstain or vote
“no” on a deal.
Merion had bought its 3% stake too late in the
process—just days before the buyout vote—to be eligible to vote them
Instead, its shares were nominally held by Cede & Co.,
a centralized warehouse for stock certificates. In a buyout, Cede acts
as an aggregator, collecting ballots from shareholders and then voting
its stock in bulk accordingly. Cede held 29 million shares of
Ancestry.com, of which about 10 million either voted “no” or
abstained, according to court filings.
Ancestry.com said Merion couldn’t prove its shares were
among them, and indeed, when asked in a deposition, a Merion executive
said he couldn’t be sure.
But the judge said there were enough Cede votes against
the buyout to “cover” Merion, which only own 1.3 million shares.
Historically, courts didn’t scrutinize the issue as long as the total
number of shares seeking appraisal didn’t exceed the number of shares
that abstained or voted “no”—as was the case here.
The ruling’s takeaway also applies to a similar defense
mounted by BMC Software Inc. against Merion in pending appraisal
litigation over BMC’s 2013 buyout. The judge on Monday let Merion’s
claims, valued at some $350 million based on the buyout price, go
A decision the other way would have complicated
appraisals by forcing hedge funds to buy their shares far earlier in
the process. That increases their risk of the deal going bust and
crimps their annualized returns by tying up their money longer.
The appraisal strategy has gained popularity in recent
years on the heels of several big wins for shareholders. A record 33
appraisal claims stemming from public-company takeovers were filed
last year in Delaware, the legal home to most U.S. listed firms,
according to a Wall Street Journal review of court documents.
And the strategy is attracting new and larger players.
Pennsylvania-based Merion has nearly $1 billion under management,
according to a person familiar with the matter, and some $750 million
tied up in pending lawsuits. Magnetar Financial LLC,
Fortress Investment Group LLC and
Gabelli Funds all have active appraisal cases.
“Sophisticated investors are seeing significant
valuation gaps in certain deal prices,” said Kevin Abrams, a lawyer
for Merion, adding that he expects more to come.
About 81% of Delaware appraisals that went to trial
since 1993 have yielded higher prices, according to law firm Fish &
Richardson PC. Merion has averaged an 18.5% annualized return across
five completed appraisals, four of which settled, according to
documents reviewed by the Journal.
Liz Hoffman at