July 29, 2016
Face Tough Decision Under New Del. Appraisal Law
July 28 — Delaware corporations can take steps to limit their costs in
shareholder appraisal litigation when a new law kicks in Aug. 1.
However, while the companies can save money by making early payments
to shareholders challenging the deal price in mergers and
acquisitions, that also may inadvertently fuel more litigation by
unlocking money for shareholder litigants.
Attorneys told Bloomberg BNA that the decision to take advantage of
the changes to Delaware's appraisal statute may not be
straightforward, and involves both economic and strategic
“It should be an easy decision, but it's not,” John Landry, a Los
Angeles-based special counsel at Sheppard, Mullin, Richter & Hampton
LLP, told Bloomberg BNA in an e-mail.
Delaware, shareholders that choose not to participate in a merger can
ask the state's chancery court to assess the value of their shares.
Petitioners that file such claims are awarded interest on the court's
appraisal determination at 5 percent over the Federal Reserve discount
rate, compounded quarterly. The interests on the claims accrue from
the effective date of the merger until the judgment is paid.
Starting in August, a new law gives Delaware-incorporated companies
the option of making a payment to appraisal claimants to prevent the
accrual of interest. The prepayment amount is at the company's
The law was enacted partly because of concerns that the statutory rate
was spurring some appraisal claims, especially those involving a
strategy known as “appraisal arbitrage,” where investors acquire a
large block of shares in a company shortly after it announces that it
is merging with another, with the intent to file an appraisal petition
after the deal closes.
take advantage of the statutory amendment, one hurdle that companies
may have to overcome is the psychological barrier against prepaying an
appraisal award. “Companies are rational, economic actors, and one
would expect them to want to reduce the amount of any appraisal
judgment and the amendment provides a mechanism to do just that,” said
Landry, who is a member of his firm's Business Trial Practice Group.
However, prepaying a judgment is something companies in litigation
aren't used to doing, he added. “It's really a foreign concept.”
Among other strategic considerations, companies should keep in mind
that by prepaying, they may be freeing up money for appraisal
petitioners that would otherwise be locked up in litigation, said
David J. Margules, a Delaware-based partner at Ballard Spahr LLP.
Stockholders that file appraisal petitions might not get a penny for a
year and a half to two years if prepayments aren't made, and “that's a
real deterrent for a lot of people,” Margules said.
The attorney added that appraisal petitioners have a certain amount of
time after a deal closes to withdraw their demands. If a company comes
right out and says it's not going to make an early payment, there may
be some petitioners that opt to take the merger consideration, he
Additionally, it is not clear what impact prepayment will have on
“While many who buy on the announcement of a merger to pursue
appraisal rights believe the fair value is higher than the deal price,
those hoping to use the favorable interest rate as leverage for a
quick settlement will have to think twice before locking up their
capital,” said Margules, who has 30 years' experience litigating a
broad range of business disputes.
Prepayments also may affect the settlement process.
Frederick D. Lipman, a partner at Blank Rome LLP, told Bloomberg BNA
in an e-mail that for cash mergers, he expects most acquirers to make
the early payments to prevent the accrual of interest, assuming the
interest environment remains the same.
the absence of an early cash payment, the appraisal petitioner is
encouraged to proceed with the case and not settle because of the
potential higher return, said Lipman, who advises a wide range of
clients in corporate and securities issues.
However, in stock mergers it would be a “close call” whether to make
the prepayment, he said. “The acquirer would have to weigh the cost of
the early payment of cash against the benefit of forcing the dissenter
to pay their own litigation cost, which could have the effect of
inducing a favorable settlement."
Assessing the Appraisal Claim
Companies that opt for prepayment also must consider the amount they
want to pay.
The figure will depend on an assessment of the appraisal claim, which
takes into account the financial valuation considered by the board,
the actual deal price, and any market check process undertaken, said
William Mills, a New York based-partner at Cadwalader, Wickersham &
“Depending on that assessment, it may be advisable for a company to
make a payment at a value that is at least equal to the company’s view
of valuation based on those factors,” said Mills, who chairs his
firm's Corporate Group. “Interest would then accrue only for any
excess valuation the claimants can prove.”
company may have concerns that the amount it prepays will be
interpreted by the petitioner, or even the court, as some indication
of the company’s estimate of fair value, Landry said.
Landry also noted that to take full advantage of the amendment, a
company will want to prepay as soon as the appraisal petition is
filed, which likely is before it has retained a valuation expert or
the expert has completed his work.
Accordingly, the company must consider the chances that the amount
prepaid might exceed its own expert’s estimate, and the optics of
that, Landry said. “These considerations will likely prompt companies
to not utilize the amendment, or to prepay using a low-ball estimate
that would fail to take full advantage of the cost-saving opportunity
the amendment affords.”
The decision to prepay or not ultimately could be driven by economic
factors. Companies must consider their balance sheets and whether they
have cash available, attorneys said.
The answer will vary from company to company, Landry said. “Each
company will need to determine whether prepaying to reduce the
interest component of the appraisal award years down the road is the
best use of its current cash,” he said. “It may not be.”
Margules warned that interest rates also factor into the equation. The
interest amounts in appraisal cases may have assumed an outsized
significance recently because the statutory rate has been so much
higher than the market rate, he said.
don't know if anybody anticipates that the historic low [market] rates
will continue, so whatever we are thinking today, the calculus will
change somewhat in a different interest environment,” he said.
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contact the editor responsible for this story: Yin Wilczek at
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