WALL STREET JOURNAL.
Deals & Deal
Wall Street Law Firms Challenge Hedge-Fund Deal Tactic
Lawyers take issue with ‘appraisal arbitrage’ strategy
6, 2015 8:53 p.m. ET
A group of large Wall
Street law firms have banded together in an unusual bid to clamp down
on a popular hedge-fund strategy aimed at squeezing more money from
Cravath, Swaine & Moore LLP; Davis Polk & Wardwell LLP and Latham &
Watkins LLP—are urging changes to rules governing an “appraisal,” a
legal move in which stockholders who feel shortchanged by a takeover
seek a higher valuation.
The firms made their case
in a letter sent last week to a group of Delaware lawyers charged with
recommending changes to the state’s corporate code, which governs the
vast majority of U.S. public companies. A copy of the letter was
reviewed by The Wall Street Journal.
The backdrop for the push
is a sharp rise in so-called appraisal arbitrage, in which funds buy
shares of a company on the brink of a sale and argue it is worth more
than the takeover price. A record 33 public-company appraisal cases
were filed last year in Delaware, and another 20 have been filed in
2015, according to a Wall Street Journal analysis. The targets are
often private-equity-backed buyouts, with both of the largest such
deals agreed to last year being challenged, those for grocery-store
chain Safeway Inc. and retailer PetSmart Inc.
The law firms that signed
the letter are some of the biggest names in mergers and acquisitions.
Among their top clients are private-equity firms and target companies,
which generally oppose appraisal arbitrage, as it threatens to
complicate their deal making and make it less lucrative.
The issue is likely to
come to a head by June 30, when the Delaware legislative session ends.
Delaware law allows
investors seeking appraisals to buy shares right up until a deal
closes, after the voting-eligibility deadline known as the record
date. Critics argue the setup leads to an abuse of the appraisal
right, which they say was meant to protect long-term shareholders from
being taken advantage of in a merger. Also encouraging funds to mount
the campaigns: They are guaranteed interest equivalent to 5.75%
annually on the value of their stakes as the appraisal review takes
place. That amount, established during a period of higher interest
rates, is especially attractive amid today’s low yields.
The New York firms want to
deny appraisal rights to funds that buy shares after the record date,
according to the letter, which is also signed by Skadden, Arps, Slate,
Meagher & Flom LLP; Simpson Thacher & Bartlett LLP; Sullivan &
Cromwell LLP and Wachtell, Lipton, Rosen & Katz.
Such a change would
“reduce the unseemly claims-buying that is rampant and serves no
legitimate equitable or other purpose,” the letter said. The threat of
an appraisal could lead acquirers to bid less upfront, knowing they
may be forced to pay more later, the letter added.
The proposal goes further
than one proposed by the group reviewing potential changes, whose
recommendations are typically approved by the state legislature with
A lot is at stake for the
companies in question. Hedge funds including
Fortress Investment Group LLC and
Magnetar Financial LLC are seeking appraisal for some $230 million of
shares in Dole Food Co., whose case is pending a decision. They are
looking for nearly twice the $13.50-a-share the company’s chairman
agreed to pay in his 2013 buyout of the firm, which was valued at $1.2
Some deals have attracted
even bigger bets. Hedge funds including Third Point LLC have nearly
$890 million tied up in claims challenging the roughly $8.25 billion
buyout of PetSmart. It isn’t clear yet how much the funds will seek
above the $83-a-share price a private-equity group agreed to pay for
the company late last year.
Liz Hoffman at