Bar Association Appraisal Measures
Headline DGCL Amendment Package
McParland, Delaware Law Weekly
April 6, 2016
At the heart of this year's proposed amendments to the
Delaware General Corporation Law were the Delaware State Bar
Association's long-discussed measures aimed at addressing the rising
tide of appraisal actions in the Court of Chancery.
The proposals were part of last year's annual package
to be approved by the General Assembly. But amid a push to limit a key
holding in a 2014 Delaware Supreme Court decision, ATP Tour v.
Deutscher Tennis Bund, the bar association tabled the amendments
until they could get a fuller hearing by the General Assembly.
"Rather than doing two controversial things in one
session, I think the idea was to just let the appraisal [proposals]
simmer a little bit," said Lawrence Hamermesh, a member of the DSBA's
corporation law section, which is responsible for drafting the yearly
Now, two ideas in particular are coming to the fore,
some attorneys said, in a package of what council members described as
otherwise "moderate" measures.
The first would limit the right to bring appraisal
actions against publicly traded companies if the claim is de minimis,
or too insignificant to warrant judicial scrutiny.
Under the proposed amendments, the court could dismiss
appraisal proceedings if the total number of shares entitled to
appraisal falls below 1 percent of the outstanding shares eligible for
appraisal or if the value of the merger consideration for the shares
does not exceed $1 million.
But another appraisal measure is garnering attention
for its potential to curb the controversial—and increasingly
prevalent—practice of appraisal arbitrage by allowing corporations to
pay stockholders pursuing appraisal claims at any time before a final
judgment is entered by the court.
Appraisal arbitrageurs typically buy up shares with
appraisal rights just after a merger is announced in the hope of
collecting a generous appraisal award, with interest. Currently, no
payment may be made until a final award is entered by the court;
meanwhile, interest on the shares runs from the effective date of the
merger, compounded quarterly at 5 percent over the Federal Reserve
The proposed amendment would cut off the accrual of
interest, which would only accrue on the difference between the amount
paid and the fair value as determined by the court and on any interest
already accrued, if it was not paid by the corporation.
Francis G.X. Pileggi, a corporate and commercial
litigator with Eckert Seamans Cherin & Mellott, said a rise in
appraisal actions over the past five years and the increased clout of
appraisal arbitrageurs had raised "major concerns" among some in the
bar, and the proposed changes to the DGCL were long overdue.
"Most observers think these were corrections that
should have been done a long time ago," he said.
The Chancery Court itself has also expressed
frustrations as appraisal actions have taken up a larger portion of
In the 2015 case Merion Capital v. BMC Software,
Vice Chancellor Sam Glasscock III said appraisal actions have "become
a common scenario in this court," and he chided the petitioners,
calling them "arbitrageurs who bought, not into an ongoing concern,
but instead into this lawsuit."
The result, he said, was a drawn-out lawsuit that put
the court in the position of determining the fair value of shares.
In 2014, Glasscock also addressed the issue in a letter
opinion in Huff Fund Investment Partnership v. CKx. In that
case, the respondent asked the vice chancellor to order the petitioner
to accept a payment in order to cut off the running of interest.
Glasscock, who saw the "potential utility of such an
approach," declined to do so, noting that the existing statutes in the
DGCL limited the court's authority in that regard. Still, he
identified the need for lawmakers to revisit the law.
"I note that, compared with fault-based litigation, the
opportunities for rent-seeking in appraisal actions are comparatively
high; therefore, factors that tend to create perverse litigation
incentives in these actions deserve close consideration by policy
makers," he said.
It is unclear to what extent statutory interest plays
in incentivizing appraisal actions, but studies have cited it as a
factor, along with earlier rulings in favor of appraisal arbitrageurs
and a perception that the Court of Chancery is more inclined to find
fair values above the transaction price.
If approved, an amendment allowing corporations to cut
the accrual of interest would both disincentive appraisal arbitrage
and perhaps provide some insight into the causes that are driving the
practice in Delaware, said Matthew J. O'Toole, chair of the
corporation law section.
"To the extent the interest rate is an incentive to
bring a claim, this tool … would remove the interest rate as the
incentive to bring a claim," O'Toole said, noting that the amendment
would apply to all appraisal proceedings and not just cases involving
In other areas of corporation law, O'Toole said a
number of proposed changes to the DGCL would bring greater "certainty
and clarity" to certain statutes, based on recent court decisions,
trends and input from the bar.
For instance, another set of proposed amendments would
make technical changes to Section 251(h), which governs short-form
mergers, a fairly common method where a parent corporation merges with
its own subsidiary company.
The amendments would extend the subsection to apply to
corporations that have any class or series stock listed on a national
securities exchange or held of record by more than 2,000 holders just
before a merger agreement, even if not all of the corporation's stock
is listed or held.
It would also include rollover stock—and shares of
stock held by direct and indirect parent entities and their wholly
owned subsidiaries—for the purpose of calculating whether an offeror
has sufficient shares to approve the merger.
An amendment to Section 111 would also give the Court
of Chancery concurrent jurisdiction with the Superior Court over civil
actions involving an offer or sale of the stock, property or assets of
a Delaware corporation. The provision would give parties the option to
opt out of the Superior Court in favor of a venue they are more
Other proposed amendments to the DGCL include measures
to address quorum and voting requirements of a board and its
subcommittees, a mechanism to restore a corporation's certificate of
incorporation after it expires by limitation, as well as other
procedures for revoking dissolution and reviving a certificate of
incorporation after it has become forfeited or void.
Corporation law section members were set to formally
vote on the amendments Tuesday. From there, the proposals would go to
the DSBA executive committee for approval, likely during its scheduled
meeting April 21.
O'Toole said that timeline would give the General
Assembly two months to act before the legislative session ends in late
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