Clearwire Ruling Shines Light On Appraisal
Wilmington (July 25, 2017, 8:31 PM EDT) -- The Delaware Chancery Court's
recent opinion appraising the fair value of
Clearwire Corp. stock at nearly 60 percent below the
Sprint Nextel Corp. buyout price delivered a stunning blow to the
so-called appraisal arbitrage practice that highlights its enormous risks,
but is unlikely to stem the tide of such challenges in a climate that
still favors them, experts say.
Vice Chancellor J. Travis Laster's
that found the fair value of
Clearwire stock at $2.13 per share, despite an actual merger price of $5,
was a bruising defeat for Aurelius Capital Management LP, which pushed for
a valuation north of $16 per share.
But, adding salt to the wound, Vice Chancellor Laster's determination of
fair value was one of the rare rulings that came in below actual deal
price — in this case, well below — in part because, by statute, judicial
appraisal doesn't take into consideration things like synergies that can
add to transactions' worth.
It would seem such a punishing loss would dissuade even the most daring
investors seeking to squeeze more value out of a merger they believe is
underpriced, and experts say the opinion will force a long, sober look at
the risks involved. But experts also agree that just one opinion will not
be enough to clamp down on appraisal challenges when litigation winds are
"Appraisal is where the money is in Delaware," said Joshua D.N. Hess, a
Dechert LLP. "You don't get post-closing damages anymore."
Hess said that the Clearwire opinion and other guidance from the courts
over the years has served as a "yellow light" to prevent deal litigation
from becoming "all appraisal, all the time," and to slow a train of
investors who may expect big paydays as a rule.
"It's a clear signal from the Chancery Court, subconscious or otherwise,
to not expect to file an appraisal case and get your stock bump," he said.
"This case will be the totem of the consequences you have if you get this
But there have been cases where the Chancery Court did give investors a
big stock bump. Two recent cases now being evaluated by the Delaware
Supreme Court, the appraisals of
Dell Inc. and DFC Global Corp., gave appraisal petitioners roughly 30
percent and 10 percent respective stock price increases.
Such rulings are not the only such incidents and their fruits have borne a
practice known as appraisal arbitrage, a strategy in which investors buy
up stock after a deal is announced with plans to seek judicial appraisal
and get a premium.
It's unclear when Aurelius actually bought its stake in Clearwire, but the
strategy, and any appraisal petition, comes with risks. Those who petition
for appraisal can be essentially on the hook for losses if a judicial
determination of fair value comes in below the actual deal price, but
rulings of that nature have been relatively uncommon.
Delaware Court of Chancery has proven time and again that it can and
will award significant recoveries in mispriced deals subject to
appraisal," said A. Thompson Bayliss, partner with Delaware law firm
Abrams & Bayliss LLP. "I don't expect the [Clearwire] outcome to deter
sophisticated players from pursuing appraisal in cases where they have
confidence in their unfair sale process and valuation arguments."
Bayliss added that the notion appraisal is a "no-risk game" is an
"ill-informed theory," and Lawrence Hamermesh, professor of corporate and
business law at Widener University Delaware Law School, said that a string
of cases that had very few consequences for petitioners might have fueled
Cases that have either yielded big premiums, or at least leaned on deal
price as the fair value — in which it could be argued the only real loss
is litigation costs — created an environment where there was little
downside to "roll the dice" on appraisal, Hamermesh said.
But the professor added that investors should have "never thought of this
as an ATM that spits out money," and the "possibility was lurking" of a
Chancery Court decision that would hammer investors.
"The mentality that this ought to be a no-risk thing is just wrong,"
Hamermesh said. "If that discourages appraisal arbitrage, it's unfortunate
for some practitioners, but it's not unfortunate for the system."
Appraisal, even arbitrage, acts as a "safety valve" or check on deals
where a price is genuinely too low because of an unfair transaction or a
conflict of interest, Hamermesh said.
Hess adds that the Delaware Legislature has been "tentative to close the
door on arbitrage," perhaps for that very reason.
The Clearwire decision acts as a major warning marker on risks, but the
litigation landscape has changed in the Chancery Court over the past two
years since the Delaware Supreme Court's now-famous Corwin v.
KKR Financial Holdings LLC ruling.
Many plaintiffs attorneys would instead call it infamous, contending that
the ruling — which allowed many breach of fiduciary duty claims to be
"cleansed" by a fully informed shareholder vote — has made it unreasonably
difficult to adjudicate successful shareholder claims.
That pressure has been pushing many shareholders over to appraisal
actions, where a petitioner doesn't have the difficult task of proving
there was any fiduciary duty breach in order to see a victory and claim a
premium, experts say.
Despite a "dramatic outcome," the Clearwire decision still followed
straightforward appraisal logic that has been consistent with the judicial
canon so far, Hess said.
Investors and attorneys are waiting for a particular shoe to drop —
specifically, the Supreme Court's decisions in Dell and DFC, which are
expected to delve into the role of deal prices in appraisal evaluations,
according to Hamermesh.
The DFC case has already been argued before Delaware's justices and is
pending a ruling. Arguments over the Dell case are scheduled for September
in Dover, according to court records.
There's also the notion the facts surrounding Sprint's buyout were so
unusual, they're unlikely to be repeated.
At first glance, the case appears to have some of the same issues that can
crop up in controlling-party takeovers, such as uncertainty about what
insiders might know about a target company, said Jeremy D. Anderson, a
Fish & Richardson PC's Delaware office.
But it's an unusual instance where the controller was also a strategic
buyer, the assets meshed together with synergies valued at upward of $2
billion, and there was a late-stage bidding war with
Dish Network Corp. that not only drove the deal price up, but
essentially cleansed what Vice Chancellor Laster said was "unfair dealing
early in the process."
"This reiterates that appraisal is very fact-specific," Anderson said. "If
we count this as a strategic transaction, then it may temper appraisal
somewhat for this specific type of transaction ... it is a stark reminder
of the risks of appraisal actions. There aren't many cases out there that
find fair value is below the deal price."
Alston & Bird LLP partner Kevin Miller also noted the fact-specific
nature of the case, contending that Aurelius had an argument that "didn't
reflect the objective reality of the case."
"The petitioners were, in a sense, rolling the dice on this," Miller said.
"You're wondering why the petitioners pursued appraisal in the first
Hamermesh said that a "rethinking of investment strategies is an
inevitable consequence" of the ruling.
Appraisal arbitrage "hit a high watermark" when the rulings appeared to be
rolling in the petitioners' favor, but there now may have been "a
restoration of an appropriate balance," he said.
The cases are ACP Master Ltd. et al. v. Sprint Corp. et al., case number
8508, and ACP Master Ltd. et al. v. Clearwire Corp., case number 9042,
both in the Delaware Court of Chancery.
--Editing by Katherine Rautenberg and Kelly Duncan.
© 2017, Portfolio Media, Inc.