Dealmakers Eye Safeguards Amid Rising Valuation Challenges

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By Michael Greene

An increase in Delaware litigation over merger prices has some deal lawyers looking at ways to let their corporate clients walk away unscathed if shareholders make appraisal demands.

Deals this year that have included these “appraisal out” or “blow” clauses include the Chicago Board Options Exchange’s $3.4 billion acquisition of Bats Global Markets Inc., and a private investment group’s $2.9 billion acquisition of Sterling, Va.-based information provider Neustar Inc.

“Appraisal rights have become a meaningful concern in public company M&A deals,” Jonathan Corsico, a Washington-based partner at Gibson, Dunn & Crutcher LLP, told Bloomberg BNA. As a result, appraisal conditions are becoming more common than they used to be, especially in deals involving smaller companies, he said.

Lawsuits arising from appraisal demands can take years to resolve and millions of dollars to defend. The suits add to the costs of mergers and acquisitions in Delaware, which is home to more than half of all U.S. public companies.

There have been 22 appraisal lawsuits filed so far this year, challenging 11 deals, according to Bloomberg Law data. There were 77 appraisal lawsuits filed in 2016 challenging 48 deals, compared to 51 lawsuits in 2015 challenging 33 deals.

Dell, DFC Global Cases

Appraisal-out clauses generally allow sellers to walk away from a deal if shareholders that own a certain percentage of the target’s stock threaten to seek an appraisal of the “fair value” of their investment.

Use of the clauses also may be boosted by recent appraisal rulings from the Delaware Chancery Court. The court found that shareholders who challenged Dell Inc.’s management buyout in 2013 and DFC Global Corp.’s acquisition by private equity firm Lone Star Funds in 2014 should have gotten more for their shares than the deal price the companies agreed to.

Both lawsuits have been appealed to the Delaware Supreme Court.

The Dell and DFC Global cases sparked “real angst” among deal professionals, said Corsico, whose firm is representing DFC Global in its appeal. The rulings showed that the chancery court was willing to assign a price above the deal value as the appraised value, even in deals that were highly public or involved significant auction processes, he said.

However, attorneys representing parties on the other side of Dell and DFC Global told Bloomberg BNA that corporate concerns about the rulings may be exaggerated.

The recent Delaware rulings aren’t impacting deal agreements, Stuart Grant, the Wilmington, Del.-based co-founder and managing director of Grant & Eisenhofer PA, told Bloomberg BNA in an email. “This is the ‘big lie’ that is being circulated,” said Grant, whose firm represents the DFC Global and Dell shareholder petitioners.

“Think about it. If 10 percent of the stock seeks appraisal and gets a 30 percent uplift, that still only raises the total cost of a deal by 3 percent,” Grant said. “When arguing to support deal protections we are constantly told that a 3 percent break-up fee doesn’t preclude a topping offer. Plus, the buyer gets to use the appraisal petitioners’ capital at a below-market rate during the time of the appraisal, which both reduces the cost and provides higher leverage for the transaction.”

Use of Appraisal Outs

Assessing how frequently the clauses are being included is difficult since language and conditions can differ.

For example, the merger agreement between CBOE and Bats would have barred the deal if shareholders holding more than 20 percent of Bats stock made an appraisal demand. On the other hand, the Neustar acquisition—which is pending—would be dropped if shareholders holding more than 8.5 percent of Neustar stock challenge the deal price.

Attorneys say blow provisions are still rare in large public company mergers, but more common in smaller deals, such as Midland States Bancorp Inc. and Centrue Financial Corp.'s $175 million merger. Their agreement says the deal won’t proceed if an individual shareholder holding 3 percent of Centrue stock, or an aggregate of shareholders holding more than 5 percent, make appraisal demands.

The risk of appraisal litigation “hinges on the size of the deal and the capacity of the acquirer to pay the costs and potential increased price in a successful appraisal action,” said John Stigi III, a California-based partner at Sheppard Mullin Richter & Hampton LLP who co-leads his firm’s Corporate/Securities Litigation team. “In a smaller deal, the risk of a big hit is a lot lower,” Stigi told Bloomberg BNA.

It’s too early to say how popular appraisal-outs will become, or whether they will start incorporating uniform language, said M. Adel Aslani-Far, a New York-based partner at Latham & Watkins LLP who represents large multinational corporations in M&A transactions. He told Bloomberg BNA that many sellers still are reluctant to agree to appraisal-out conditions because they don’t want to subject their transactions to the uncertainty.

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Yin Wilczek at

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