Appraisal: Shareholder Remedy or Litigation Arbitrage?

34 Pages Posted: 19 Apr 2016 Last revised: 30 Jun 2018

See all articles by Wei Jiang

Wei Jiang

Columbia Business School - Finance and Economics; ECGI; NBER

Tao Li

University of Florida - Department of Finance, Insurance and Real Estate

Danqing Mei

Columbia University - Columbia Business School

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Date Written: April 20, 2016

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

Suggested Citation

Jiang, Wei and Li, Tao and Mei, Danqing and Thomas, Randall S., Appraisal: Shareholder Remedy or Litigation Arbitrage? (April 20, 2016). Journal of Law and Economics, Vol. 29(3), No. 697-729, 2016; Columbia Business School Research Paper No. 16-31; Vanderbilt Law Research Paper. Available at SSRN: https://ssrn.com/abstract=2766776 or http://dx.doi.org/10.2139/ssrn.2766776

Wei Jiang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
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(212) 854-5553 (Phone)

ECGI ( email )

c/o the Royal Academies of Belgium
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Belgium

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Tao Li

University of Florida - Department of Finance, Insurance and Real Estate ( email )

Warrington College of Business
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/contact/profile.asp?WEBID=7628

Danqing Mei

Columbia University - Columbia Business School ( email )

NY
United States

Randall S. Thomas (Contact Author)

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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