New Delaware Appraisal Law Leaves Companies with Tough Decision


MoneyDelaware corporations can take steps to limit their costs in shareholder appraisal litigation under a new law that took effect Aug. 1.

However, while companies can save money by making early payments to shareholders challenging the deal price in mergers and acquisitions, the new law 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 considerations.

“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.

In 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.

The 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 discretion.

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.

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