Delaware appraisal litigation has been receiving its fair share of attention from commentators and the judiciary. Now it is time for the legislature to enter the mix. In response to the controversy surrounding “appraisal arbitrage,” the Delaware Bar Association’s Corporation Law Council assembled a subcommittee to determine whether the State’s appraisal statute, 8 Del. C. § 262, needs to be amended to curtail the threat of ever-increasing appraisal claims. While the Council dismissed the idea that drastic amendments are needed to bar claims by stockholders who purchase shares after the merger (or transaction) approval, it did propose two modest changes to the statute in an effort to limit frivolous claims and interest rate arbitrage. The question is, will these modifications make any appreciable difference in practice?
The Council’s first proposal is a “de minimis exception” for publicly traded shares. This amendment would effectively lead to dismissal of any appraisal claim that (1) is brought by parties owning less than 1 percent of the total outstanding shares and (2) has a value less than $1 million. The reasoning behind this proposal is that claims falling beneath this threshold do not warrant the substantial costs placed on the judiciary and the parties. The reasoning is sound, but the proposal is unlikely to make any real difference in practice.
The evidence suggests that the large majority of appraisal claims easily surmount the de minimis threshold. Only about 17 percent of the total potential appraisal claims are ever actualized, and the value of shares seeking appraisal is approximately $1.5 billion. The vast majority of these claims obtain a premium in excess of the merger price, and it is not uncommon for the premiums to exceed 100 percent of the merger price. Notably, the data referenced above, while instructive, does not reflect “nuisance settlements” or meritorious settlements for that matter. Certain factors already serve as a bar to nuisance claims. As pointed out by others, the costs of pursuing an appraisal claim (including costs for experts and other expenses) can easily surpass $1 million. Claimants also face the risk that fair value will be declared less than the merger price. For a nuisance claim to be effective, there must be some real chance of litigation and these factors limit that chance. It is possible that this proposal will bar some claims, but the number of those claims will likely be minimal. The proposal is a positive attempt to limit frivolous claims but is unlikely to have any material impact considering its limited scope.
The Council’s second proposal is the “option to pay and limit the accrual of interest.” Unlike the de minimis exception, the option to pay proposal will likely yield practical benefits. In light of concerns that interest rate arbitrageurs bring claims solely for the Federal Reserve discount rate plus 5 percent as set forth by statute, the Council created this proposal to give corporations the option to either pay claimants upfront, thus eliminating the benefit of statutory interest rates, or proceed as usual. Corporations also have the option to pay a percentage greater or less than the merger price, thereby reducing the overall exposure for potential interest payments when the premium ends up exceeding the merger price (or the upfront payment).
The benefits of this proposal are two-fold. First, corporations can actively use it as a mechanism to place limits on claimants solely seeking the benefit of generous interest rates, and thus reduce the number of unmeritorious appraisal claims. Second, it increases freedom by giving corporations the ability to make a business decision as to whether it is more prudent to pay a certain sum upfront or face the potential risk of an award for interest payments on claims that may last for several years.
The legislature will likely make a decision on this issue in the near future. If the proposed amendments are passed, then only the option to pay has a significant chance of yielding material results.
Jacob Fedechko is a student at Widener University School of Law and member of the Delaware Journal of Corporate Law. He is also the incoming Editor-in-Chief of the Delaware Journal of Corporate Law, Volume 41.
Suggested Citation: Jacob Fedechko, Proposed Amendments to Delaware’s Appraisal Statute: How Much Do They Matter?, Del. J. Corp. L. (Apr. 13, 2015), www.djcl.org/blog.