Increase in Delaware Appraisal Cases: Increased Shareholder Activism or Growing Hedge Fund Involvement?

By: Mark Tarallo

Any M&A transaction, especially a contested transaction or a transaction involving insiders, can lead to litigation.  One type of litigation is an appraisal claim, where shareholders contest the value put on the company in the transaction and ask a court to determine “fair value.” According to an article by Professors Minor Myers and Charles Korsmo, the value of appraisal claims filed in Delaware in 2013 was approximately $1.5 billion, almost ten times the value of appraisal claims in 2004.  More than 15 percent of all takeover cases resulted in appraisal claims during 2013.  The increase in appraisal cases over the last few years is likely tied to the decision of the Delaware Chancery Court in Transkaryotic (May, 2007) in which the court ruled that a party did not have to own the shares in the target as of the “record date” used to determine shares eligible to vote at a meeting to approve the transaction; instead, the party could acquire the shares at any time up until the meeting approving the deal.  This created an arbitrage opportunity for larger investors, who could wait until immediately before a shareholder meeting (and have a better understanding of the offer) before purchasing a stake in the target.  In addition, there is a very high interest rate payable on any awards (federal funds rates plus 5% running from closing of transaction to payment of any award).   These two factor have made appraisal arbitrage a very attractive play for larger hedge fund investors, likely the primary driver (versus dissatisfied shareholders exercising their rights) behind the increase in the dollar value of appraisal cases.

For more information on this topic, please feel free to contact Mark.

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