The Short, Unhappy Life of the Recent Appraisal Trend
By DAVID SHINE & JENNIFER TYTEL
During the past two years, appraisal suits appeared to be the next frontier in deal litigation. In 2013, investment funds with substantial holdings in Deltek, Inc. and Health Spring Inc. brought appraisal claims in connection with the sales of each of those companies. Other investment funds took notice, seeing appraisal claims as a potentially attractive way to enhance deal returns in an environment where traditional deal litigation had for years resulted in “disclosure only” settlements with no additional financial payment to shareholders. Appraisal litigation offered the possibility of providing shareholders with an increased deal price plus interest (currently at approximately 5.75% per annum).
Recently, however, there have been several developments that we believe are likely to cool future high stakes appraisal claims in public company transactions. First, in both the Ancestry.com and the Huff Fund/CKx appraisal decisions, the Delaware Court of Chancery found that in light of, among other things, the robust sales processes undertaken in connection with those transactions, the deal price was indicative of fair value. In Huff Fund/CKx, Vice Chancellor Glasscock found that “merger price is the most reliable indicator of value” and reiterated that sentiment in Ancestry.com, where he held that “because the sales process here was robust, I find fair value in these circumstances best represented by the market price.”
Second, the corporate law council of the Delaware Bar Association (an influential group with respect to the Delaware corporate statute) has recently proposed amendments to Section 262 that would allow companies to limit accrual of interest during appraisal proceedings by paying shareholders the deal price prior to final disposition of appraisal proceedings. The proposed amendments to Section 262 still need a legislative sponsor to introduce them before the General Assembly can vote on them. However, the Delaware legislature has regularly followed the recommendations of the corporate law council and we expect that they will be adopted by the legislature. The amendments (if adopted) would apply to merger agreements entered into beginning August 1, 2015.
In light of these developments, appraisal claims for public company transactions may diminish, particularly in circumstances where there is not an interested shareholder. In such “disinterested” transactions, recent experiences have in any event been mixed for plaintiffs and the cases have taken an average of about two years to resolve. One practical effect of this diminishment is that acquirers may focus less on protections such as closing conditions tied to lack of appraisal claims (which conditions, in any event, provide little meaningful protection given the practical pressures to close transactions).
In public company transactions with interested shareholders, appraisal will likely continue to offer a meaningful remedy. And appraisal will, of course, continue to serve as the primary remedy for shareholders of private companies who are squeezed out in processes that are not fully transparent.
Paul Hastings LLP
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