Litigation That Works
Charles Korsmo is an assistant professor at Case Western Reserve
School of Law, and Minor Myers is an associate professor at Brooklyn
Law School. They provide compensated advice on stockholder appraisal.
A battle is
brewing in Delaware over what was, until recently, a quiet corner of
corporate law: stockholder appraisal rights, which allow shareholders to go
to court to contest the price paid in a corporate buyout.
studied appraisal litigation extensively, and our research indicates that it
plays a strongly beneficial role in mergers and acquisitions. Although
shareholder litigation is often a pestilential bog of nuisance suits,
appraisal cases stand out as something unusually valuable — a form of
shareholder suit where the merits actually matter.
of appraisal rights has increased substantially in recent years, prompting
serious hand-wringing in certain quarters.
lump appraisal litigation with other, more dubious forms of shareholder
suits, and then decry them all as nuisance litigation. Our research,
however, shows that appraisal suits are different. They are targeted
litigation driven not by plaintiffs’ lawyers but instead by sophisticated
investors who often acquire stock specifically to bring an appraisal suit.
Because these appraisal specialists put their own money on the line, they
pick their battles carefully.
shareholder suits are brought virtually indiscriminately, but in our
academic work, we have shown that appraisal litigation is significantly
associated with buyouts with an unusually low deal price and where insiders
are part of the acquiring group. These are precisely the deals where
something is most likely to have gone wrong: Insiders may have favored
themselves over the shareholders, or the board through negligence or
favoritism may have failed to adequately shop the company.
2013 buyout of the
Dole Food Company by the company’s
chief executive, David H. Murdock, for $13.50 a share, or about $1.6
billion. The deal has generated one of Delaware’s largest appraisal cases.
transaction, Mr. Murdock held 40 percent of the company’s stock and made it
abundantly clear that he would not support a deal with anyone else. As a
result, the board approved his bid without conducting an auction to maximize
the price received by Dole’s stockholders.
price fair in the Dole deal? Many shareholders didn’t think so and asked a
Delaware court for an answer. However the case comes out, this is precisely
the sort of deal that ought to get a hard look, which is exactly what
appraisal litigation provides.
One of the
most common — and most misguided — knocks on appraisal suits is that
specialists have emerged to bring them to court, often buying shares after a
merger is announced with the intention to exercise appraisal rights.
existence of specialists should be reassuring, not shocking. Their emergence
is about as alarming as the fact that farmers don’t mill their wheat into
flour themselves. Just as a farmer is not an expert in milling, the typical
diversified shareholder is not an expert in identifying or pursuing legal
claims in court. When they sell to people who are, that’s evidence of
beneficial specialization, which redounds to the benefit of the buyer and
pernicious claim that appraisal litigation benefits only the specialists who
pursue it should also be put to rest. Just as the existence of specialist
millers benefits wheat farmers, the existence of appraisal specialists
benefits other shareholders. Most directly, appraisal specialists must buy
their stock from existing shareholders, and sometimes must pay a premium
above the deal price to do so.
today’s nascent market for appraisal claims, shareholders may do better
selling to appraisal specialists than to the acquiring company. In one case
that recently went to trial, an appraisal petitioner paid former
stockholders more than 11 percent more than the acquirer was offering.
also benefit indirectly from the genuine deterrence provided by appraisal
litigation. An appraisal filing is not like lightning, striking unsuspecting
companies indiscriminately. Appraisal specialists predominately take aim at
suspicious deals, providing genuine deterrence against lowball buyouts by
tried to portray this virtue as a vice by grousing that appraisal rights
must be curbed because it deters transactions. But the evidence suggests
that appraisal litigation deters transactions that ought to be deterred.
Dole and its
allies are pushing Delaware to sharply curtail appraisal rights and, at the
very least, limit them to shareholders who happen to own stock on an
arbitrary date set by the company.
So far, the
experts in Delaware have refused to bite. Last month, the council of lawyers
charged with drafting amendments to Delaware’s globally influential
corporate code recommended sensible changes. These proposals recognize and
affirm the beneficial role of appraisal rights, while reducing potentially
perverse incentives for appraisal specialists. The council considered the
opponents’ proposals, examined the evidence, and rejected them for what they
are: bad policy.
the balloons and confetti yet, however. What Dole and its allies could not
accomplish by reason may yet be accomplished through political lobbying, as
they continue to press to overturn the council’s recommendations.
this effort to use political leverage to deform the rules of appraisal
litigation will go nowhere. One of reasons that tiny Delaware has such
outsize influence is that it shapes its corporate law in the crucible of
sound argument and evidence, not back-room pressure. The state has a
hard-earned reputation of putting investors’ interests ahead of the
parochial interests of any one company. Critics of appraisal litigation
appear intent on putting that reputation to the test, playing to all of the
worst caricatures of Delaware as a place where corporate defendants get
whatever they want.
optimistic that Delaware will live up to its reputation of doing right by
shareholders. The bar should resist calls to gut the only form of
shareholder litigation that appears to be working well, and the legislature
should pass only the sensible reforms proposed by the council. When that
happens, shareholders can finally break out the Champagne.
The New York Times Company