Del. Merger Proposals Would Reduce Appraisal Claims: Study

By Michael Greene

May 26 — Delaware could see a significant decrease in appraisal litigation if recently proposed amendments become law, an academic study suggests.

The study—authored by professors at Columbia Business School, Warwick Business School, and Vanderbilt Law School—predicts that appraisal petitions will drop by about a quarter if a proposed reform that would dispense with certain de minimis stock-appraisal claims is enacted.

Another proposed change to the state's appraisal statute which allows companies to make payments to appraisal claimants to prevent further accrual of interest also would substantially reduce such filings, according to the study.

Delaware law allows a practice known as “appraisal arbitrage” in which investors and hedge funds buy a company's shares after a mergers and acquisitions transaction is announced, then apply to the Delaware Chancery Court to re-evaluate the price of their stocks after the deal closes. Such litigation can be expensive for the company involved because it has to defend the deal price. Several law firms—including Skadden, Arps, Slate, Meagher & Flom LLP and Wachtell, Lipton, Rosen & Katz—have asked for legislation to stop what they say is an abuse of the process (13 CARE 773, 4/10/15).

The study describes itself as the first large-sample empirical analysis of appraisal arbitrage. Bloomberg BNA's attempts May 26 to contact the authors for comment were unsuccessful.

The proposed legislation (HB 371) was introduced in the state General Assembly earlier this month (89 CARE, 5/9/16) and is currently on the Delaware Senate's “ready list” after unanimously passing the state's House May 12.

Prior Attempt

The appraisal amendments largely mirror draft legislation endorsed by the Delaware State Bar Association's Corporation Law Section last year that were never introduced into the state's Legislature (13 CARE 582, 3/20/15).

The study also found that:

•  hedge funds account for three-quarters of the dollar volume involved in all appraisal petitions in recent years;
•  appraisal petitions are more likely to target deals that have potential conflicts of interest; and
•  the proposed de minimis exception will not impact the likelihood of an appraisal case going to trial.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com