Appraisal Arbitrage Is There a Delaware Advantage?

Jetley, Gaurav; Ji, Xinyu

doi:10.2139/ssrn.2616887

“…(Although the statute allows the court to impose a different rate in exercising its equitable discretion, the overwhelming practice since the amendment has been simply to award the statutory spread.) Coming in an era of notable narrowing in spreads and reduced opportunity cost of capital, the statutory pre-judgment rate typically rendered an investment in a post-closing appraisal action against a credit-worthy acquirer to be among the highest yielding investments available (Jetly & Ji 2016).…”

Section: Introductionmentioning

confidence: 99%

Appraisal Arbitrage and Shareholder Value

Callahan

¹

,

Palia

²

,

Talley

³

2018

LFA

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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.

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“…Recent studies closest to ours include Korsmo and Myers (2015), an in-depth study (but without direct empirical analysis) of the implications of the statutory interest rate and legislative reforms, and Jetley and Ji (2016), which focuses on the Delaware advantage for appraisal petitioners in terms of purchase after the record date, a lower equity risk premium in valuation method, and the high statutory interest rate.…”

Section: Introductionmentioning

confidence: 99%

Appraisal: Shareholder Remedy or Litigation Arbitrage?

Jiang¹,

Li²,

Mei³

et al. 2016

The Journal of Law and Economics

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We present the first large-sample empirical study of the recent trends in the appraisal remedy-the right of shareholders of companies completing an eligible merger to petition the court for an improved price for their shares. Appraisal petitions have increased markedly over our sample from 2000 to 2014, and the composition of those bringing these suits has shifted from individual shareholders toward specialized hedge funds. Appraisal petitions are more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism. Appraisals yield sizable excess returns to the petitioners, with an average annualized return of 32.9 percent, which suggests that appraisals also act as a litigation arbitrage. Finally, we explore the likely effects of two recent changes to the Delaware appraisal statute-regarding the minimum stake and interest payment-on the incentives to file appraisal petitions.

show abstract

Appraisal: Shareholder Remedy or Litigation Arbitrage?

Jiang¹,

Li

²

,

Mei

³

et al. 2016

View full text Add to dashboard Cite

We present the first large-sample empirical study of the recent trends in the appraisal remedy-the right of shareholders of companies completing an eligible merger to petition the court for an improved price for their shares. Appraisal petitions have increased markedly over our sample from 2000 to 2014, and the composition of those bringing these suits has shifted from individual shareholders toward specialized hedge funds. Appraisal petitions are more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism. Appraisals yield sizable excess returns to the petitioners, with an average annualized return of 32.9 percent, which suggests that appraisals also act as a litigation arbitrage. Finally, we explore the likely effects of two recent changes to the Delaware appraisal statute-regarding the minimum stake and interest payment-on the incentives to file appraisal petitions.

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Appraisal Arbitrage Is There a Delaware Advantage?

Cited by 6 publications

References 3 publications

Appraisal Arbitrage and Shareholder Value

Appraisal Arbitrage and Shareholder Value

Appraisal: Shareholder Remedy or Litigation Arbitrage?

Appraisal: Shareholder Remedy or Litigation Arbitrage?

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