Appraisal Arbitrage and Shareholder Value

Abstract

Post-merger appraisal rights have been the focus of heated controversy within mergers and acquisitions circles in recent years. Traditionally perceived as an arcane and cabalistic proceeding, the appraisal action has recently come to occupy center stage through the ascendancy of appraisal arbitrage-whereby investors purchase target-company shares shortly after an announcement principally to pursue appraisal. Such strategies became more feasible and profitable a decade ago, on the heels of two seemingly technocratic reforms in Delaware: (i) the statutory codification of prejudgment interest, pegging a presumptive rate at five percent above the federal discount rate; and (ii) the Transkaryotic opinion, which effectively sanctified appraisal claims trading. Several commentators have decried appraisal arbitrage as visiting unnecessary risks and costs on deal certainty and pricing, advancing the position that it reduces / destroys target shareholder value. This paper interrogates such claims both theoretically and empirically, testing the predictions of an auction-design model that assesses appraisal's price and welfare effects. We find-consistent with comparative statics of our model-that the appraisal-liberalizing events of 2007 were associated with a significant increase in deal premia, as the enhanced credibility of appraisal had the effect of raising the de facto "reserve price" associated with M&A auctions. We further find little evidence that liberalized appraisal rights stifled the incidence of appraisal eligible deals. When interpreted through the lens of our auction-design model, our findings suggest that target-company shareholders likely benefited ex ante from liberalized appraisal, regardless of whether they subsequently sought appraisal or not.

Appraising the “Merger Price” Appraisal Rule

“…Finally, the equilibrium framework developed here can be used to derive several concrete predictions and comparative statics, which in turn may lend themselves to empirical testing. Although far beyond the scope of our enterprise here, several authors have begun to employ our framework to assess a variety of "shocks" that altered the availability or profitability of pursuing the remedy (See, e.g., Callahan, Palia & Talley 2017;Boone, Broughman & Macias 2017). Progress in testing predictions from our analysis sheds light on a host of other interesting debates that surround post-acquisition appraisal.…”

“…The latter result, in particular, is consistent with our theoretical findings. Boone, Broughman and Macias (2017) and Callahan, Palia and Talley (2017) both empirically investigate whether more robust (i.e., more friendly to dissenting shareholders) appraisal remedy leads to a larger merger premium. Both papers findconsistent with our theoretical predictions-that target shareholders tend to receive higher premia as the strength of the appraisal remedy increases.…”

Do Appraisal Challenges Benefit Target Shareholders through Narrowing Arbitrage Spread? A Reply

“…While this graph on arbitrage spreads was not the main result of our study, it is the focus of Jetley and Huang (2020).2 Jetley and Huang (2020) show that the ob-Prior empirical scholarship on appraisal arbitrage examines arbitrageurs' choice of which mergers and acquisitions deals to challenge (Jiang et al 2016), whether the resulting lawsuit appears meritorious (Korsmo and Myers 2015), and the impact on shareholder value (Callahan, Palia, and Talley 2018). In one of the only theory pieces on appraisal, Choi and Talley (2018) develop a model that shows conditions under which a strong appraisal regime-akin to a reservation price in an auction-can be expected to yield higher acquisition premiums.…”

Are Merger Clauses Value Relevant to Bidder and Target Sharholders?

“…We now examine if the bid premiums offered to target firms are related to the three merger clause indices. As in Roll (1988) and Callahan, Palia, and Talley (2018), we define bid premiums as the natural logarithm of gross deal premiums. Gross deal premiums are defined as the bid price bid price divided by the target's closing stock price one week prior to deal announcement, and is winsorized at the one-percent and 99-percent level.…”