An uptick in investors exercising their appraisal rights under Delaware law has gone largely unnoticed in recent years, overshadowed by increasing M&A litigation. An emerging trend reveals that hedge funds and money managers are purchasing the stock of target companies, post-deal announcement, in order to exercise appraisal rights.
In fact, entire funds have been created with this sole purpose in mind. This article discusses the risks a target company faces when investors invoke their appraisal rights.
One such risk is Delaware’s approach to fair value which can encompass more than what is paid in an arms-length transaction. The court allows wide discretion in considering all relevant factors when valuing a company and often relies on competing expert projections that are based on uncertainties as opposed to hard data.
A second significant risk is the statutory interest rate applied on appraisal awards in Delaware. Beginning with the date of closing, appraisal awards accrue interest at 5% above the Federal Reserve discount rate compounded quarterly. This incentivizes investors to bring appraisal actions despite the likelihood of only receiving an award comparable to the price paid in the merger.
This article also discusses the Delaware court’s decision in the CKx case. Specifically, the court’s favorable treatment of the underlying merger price serves as evidence of the company’s fair value for appraisal purposes. This ruling partially mitigates the risk a target company faces by allowing the merger price to serve as evidence of fair value; however by not limiting the breadth of other factors a court may also consider, a target company still faces significant risk.
The uncertainty of a fair value determination by a Delaware court, coupled with the generous statutory interest rate, point to the continued increase in the exercising of appraisal rights in mergers.
See the piece here.