So far this year, deal parties are approaching M&A with cautious optimism. This series of Cooley M&A blog posts include some brief observations that offer some M&A highlights over the past year and our thoughts for the year to come.
Appraisal Risks Factor High
In deals where stockholders have the right to an appraisal (in Delaware, generally mergers with cash consideration), appraisal risk is increasingly being factored into the deal price – not just in public deals but also in (larger) private deals. Appraisal costs can be significant: in Dell (Del. Ch. 2016), for example, appraisal claims added over $50 million to the buyer’s acquisition costs, plus attorneys’ fees and expenses. Since 2012, the number of appraisal claims challenging M&A deals rose 267% from 21 in 2012 to a high of 77 in 2016, according to Bloomberg Law.
Claimants seem emboldened by recent prominent rulings like Dell, even though about half of the time, the judge used the deal price exclusively to value the stock. Despite recent changes to the appraisal statute in 2015 that were intended to eliminate certain forms of appraisal arbitrage, hedge funds and other investors are continuing to buy stock after the announcement of a deal with the intent of seeking appraisal as a form of investment strategy. As we previously noted, certain deal factors will increase appraisal risks (director conflicts of interest, significant management involvement and LBOs). Unfortunately, current remedies like appraisal conditions have not gained wide acceptance in public deals, and the legality of contractual waivers of appraisal for private deals have not yet been resolved in the courts. Unless further changes are made to the DGCL, we can expect appraisals in at least these cases to continue.