Appraisal: Shareholder Remedy or Litigation Arbitrage?

Abstract

This study provides the first large-sample empirical analysis on the characteristics, determinants, and returns from appraisal petitions during 2000-2014. We find that appraisal petitions increase from 2-3% of the eligible M&A deals in the early 2000s to around 25% of such deals in the most recent years. Appraisal petitions, particularly in the post-2007 era, appear focused on mergers with potential conflicts of interest, such as, going private deals, minority squeezeouts, as well as targeting transactions with low deal premiums. This illustrates the importance of appraisal as a corporate governance remedy. Appraisal petitions generate non-negative gross returns for petitioners throughout the sample period, with an average (median) annualized return of 32.9% (19.3%), suggesting that appraisal litigation has been a profitable arbitrage strategy especially for specialized and frequent players, mostly hedge funds.

This study also assesses the effect of two recent changes to the Delaware appraisal statute. First, Delaware restricted appraisal to petitioners with a stake above $1 million or 1% of outstanding shares. This could cut the amount of appraisal litigation by about one-quarter, but is unlikely to distort the underlying economic reasons why shareholders seek appraisal. Second, appraisal petition filings are highly sensitive to prejudgment interest yield post-2007, with the prevailing 5% statutory rate above the risk-free rate in the current low interest era associated with a 45% increase in the appraisal petitions. This result confirms anecdotal evidence that appraisals have, to some extent, become back-door interest rate arbitrage, and supports Delaware’s statutory changes that should mitigate this problem.

Keywords: Appraisal Arbitrage, Delaware Appraisal Statute

JEL Classification: G23, G34, K22