Managing Principal Gaurav Jetley and Vice President Xinyu Ji Publish on Appraisal Arbitrage in Harvard Law School Forum
July 28, 2015
Appraisal rights actions -- that is, shareholder-prompted assessments of the fair value of an acquired company's shares -- are on the rise in Delaware Chancery Court. In their post, "Appraisal Arbitrage -- Is There A Delaware Advantage?" (The Harvard Law School Forum on Corporate Governance and Financial Regulation, July 27, 2015) Managing Principal Gaurav Jetley and Vice President Xinyu Ji consider "the extent to which economic incentives may have improved for appraisal arbitrageurs in recent years" based on three specific issues: "the economic implications of permitting appraisal rights to shares that were purchased after the record date"; the implications of Delaware Chancery Court's preference for the discounted cash flow valuation method for the assessment of fair value of the stock within the context of other preferences, requirements, and a historical track record of giving the transaction price little weight in the appraisal proceeding; and the high Delaware statutory rate on appraisal awards relative to the time value in question.
The authors contend that a shareholder should potentially be limited to appraisal rights only for "shares held as of the record date" and that the Court may want to be mindful of certain systematic differences in valuation inputs that "could create profiteering opportunities for those seeking appraisal." In benchmarking the Delaware statutory interest rate, the authors note that although "it may not be possible to set an interest rate based on the characteristics of an acquirer without increases to the scope of issues" in the appraisal proceeding, it could be valuable to limit "the amount on which the interest rate is paid." The authors point out, however, that paying appraisal claimants at the onset of an appraisal action could "address concerns regarding the statutory rate," while also allowing claimants to "pre-fund their appraisal pursuits" and encourage further arbitrage.
This post was adapted from an extended article publication.
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