Exposure to claims for appraisal can be a significant risk in merger and acquisition transactions in which dissenter’s appraisal rights are available. This risk has increased in recent years as aggressive investors realized the opportunities presented by appraisal arbitrage, including the high rate of interest payable on appraisal awards, even for shares purchased after announcement of the transaction. Sometimes the risk is handled contractually through a condition limiting the number of shares eligible to assert appraisal rights and sometimes through shifting the risk of additional payment to the sellers, or the risk is not handled at all. In any event, it is important in structuring transactions involving Delaware corporations to understand the current state of the appraisal risk in Delaware.
The Delaware legislature has taken some steps to reduce the appraisal risk through amendments to the Delaware General Corporation Law (“DGCL”), including permitting companies to make advance payments to cut off the accrual of interest. At the same time, the Delaware courts have been active in clarifying the approach to determining “fair value” for purposes of appraisal under the DGCL.
The general approach in Delaware to determining “fair value,” as defined in section 262(h) of the DGCL, since Weinberger v. UOP, Inc., 457 A. 2d 701 (Del. 1983), has been for the court to take into account all relevant factors. The Delaware Supreme Court has issued several decisions in recent years clarifying what this approach means, and the Delaware Court of Chancery has issued a number of decisions implementing the approach outlined by the Supreme Court. Section 262(h) instructs the court to appraise the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the transaction taking into account all relevant factors. In Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A. 3d 1 (Del. 2017), and DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A 3d 346 (Del. 2017), the Delaware Supreme Court indicated, without establishing a presumption, that the deal price less synergies reflected in the deal price in an arm’s-length transaction with a sale process designed to maximize shareholder value is likely to be the best indicator of fair value for purposes of the Delaware appraisal statute. The Court emphasized this approach in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2019 WL 1614026 (Del. Apr. 16, 2019), in which it reversed the Court of Chancery decision that used the unaffected trading price of the shares. Other recent Delaware decisions have used the unaffected trading price of the shares as a basis for determining fair value when the deal process did not meet the standards under Dell and DFC (e.g., In re Appraisal of Jarden Corporation, 2019 WL 3244085 (Del. Ch. July 19, 2019)) or, when the court was not satisfied that there was an efficient market, other generally recognized methods of valuation, such as a discounted cash flow methodology (e.g., In re Appraisal of AOL Inc., 2018 WL 1037450 (Feb. 23, 2018)).
As recently as August 12, 2019, in In re Appraisal of Columbia Pipeline Group, Inc., 2019 WL 3778370 (Del. Ch. Aug. 12, 2019), the Delaware Court of Chancery use the deal price less synergies as the best evidence of the fair value of Columbia Pipeline Group in connection with its acquisition by TransCanada Corporation. In fact, the Court found that the deal price was the fair value without deduction for synergies because TransCanada failed to prove that the deal price included synergies. Similarly, the Court held that the dissenters failed to prove that there was an increase in value between signing and closing. Finally, the Court found trading price not to be relevant in this case and rejected the dissenters’ effort to use the discounted cash flow methodology.
The emphasis on the deal price less synergies, when the deal process is entitled to respect, and even the fallback to unaffected trading price, when there is an efficient market, are likely to result in an appraisal fair value award in these circumstances no greater than, and often less than, the deal price, making the assertion of appraisal rights less attractive and thus reducing the risks associated with appraisal claims. This does not mean that appraisal risks should not be carefully considered in structuring transactions, but it does mean that the current state of Delaware appraisal law should reduce the significance of the appraisal risk for the parties.