Appraisal: Shareholder Remedy or Litigation Arbitrage?

Abstract

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.

Influencing Control: Jawboning in Risk Arbitrage

“…We refer readers to Jiang et al. () for a comprehensive analysis of the appraisal strategy. (iv) Activism in acquirers . The same procedure as outlined in Section I.B 2.…”

Minority shareholder treatment surrounding the Dell MBO

“…In particular, the time, cost and difficulty of adhering to the rules suggest shareholders pursuing appraisal will only do so if they believe there is a reasonable chance of being awarded a substantial premium to the deal price. Additional evidence suggests that while cases have become more common following 2010 (Jiang et al , 2016), there has not been an increase in nuisance suits, and target shareholders have benefitted in the form of an increase in deal premiums (Boone et al , 2019). See Appendix 6 for more detail.…”

“…Jiang et al (2016) documents 152 appraisal cases among 1,566 completed eligible Delaware deals over 2000 to 2014. They report appraisal becomes more common over this period, reaching 20–25% of eligible deals by the early 2010s.…”

Appraising the “Merger Price” Appraisal Rule

“…"Blow" provisions condition the buyer's duty to close a merger on a maximal threshold of shareholders seeking appraisal (typically in the 10-20% range). Each of these devices plays multiple roles in our model of (a) reallocating surplus between the winning bidder, supporting shareholders and dissenting shareholders; (b) altering the incentives of shareholders to support the deal; and (c) changing the characteristics of an optimal 15 See, e.g., Jiang et al (2016); Myers (2015 and. 16 Moreover, our argument is also robust to adjustments that strip out buyer-specific "synergies" from fair value, per DGCL §262(h).…”

“…While the empirical literature on appraisal remains thin, several recent papers have shed additional light on the issue. 23 Jiang, Li, Mei, and Thomas (2016) present an empirical investigation of appraisal remedy and show that appraisal is more likely to be exercised when there is a perception of conflicts-of-interest and when the premium offered is low. The latter result, in particular, is consistent with our theoretical findings.…”