Reforming Modern Appraisal Litigation

Abstract

This Article demonstrates that appraisal claims in Delaware during the most recent period of activity continue to exhibit multiple proxies for legal merit, suggesting that modern appraisal litigation plays a salutary if small role in M&A practice. This Article also provides an account of how appraisal — in spite of its empirical virtues — has sparked a backlash among a group of defendants and deal advisors. They have pressed Delaware policymakers to consider an amendment that would, among other things, deprive beneficial owners of appraisal rights if they were not beneficial owners on a record date set by the target board. In practice, this would limit the utility of the appraisal remedy and the beneficial effects of trading in appraisal-eligible shares. Very little substantive argument has been offered publicly to justify the deal lawyers’ amendment, but we attempt to engage with what we regard as the most plausible arguments in its favor: that appraisal as currently practiced threatens the vitality of the deal market and that it enriches dissenters at the expense of other stockholders. These arguments are without empirical support and as a matter of theory cannot withstand sustained scrutiny. In the final analysis, this effort to alter Delaware’s appraisal statute stands, at best, as a misguided effort to promote bad policy or, at worst, as a deliberate attempt to scuttle the only serious merger-related remedy available to stockholders of Delaware firms.

We propose an alternative set of reforms that would enhance the effectiveness of the appraisal remedy. Delaware should require disclosure of more financial information in appraisal-eligible transactions; eliminate the irrational exemption for all-stock transactions; and adopt a de minimis requirement. The system of awarding interest to dissenters can be improved in ways we sketch out here but develop fully in a separate paper. Lastly, we offer a simple way to meet the demand of the deal advisors — that appraisal eligibility be tied to a record date set by the board — without forsaking the governance virtues of an active appraisal market: Delaware law should require that any applicable record date be set for not earlier than 20 days following the mailing of notice of appraisal rights. This would ensure that stockholders and other market participants are able to see crucial disclosures before the record date. It thus represents a sensible compromise by giving deal advisors what they’ve demanded without destroying the policy benefits of appraisal.

Keywords: corporate governance, appraisal rights, stockholder rights, mergers, acquisitions, Delaware