Corporate Governance

Appraisal Rights

Appraisal Rights

Quick Facts

  • Also called: Dissenters' rights
  • Purpose: Allows shareholders to receive "fair value" instead of merger consideration
  • Key jurisdiction: Delaware (Section 262 of DGCL)
  • Trend: Courts increasingly defer to deal price as fair value

Appraisal rights allow shareholders who dissent from a merger to petition a court to determine the "fair value" of their shares, rather than accepting the merger consideration. It's a statutory remedy for shareholders who believe the deal price undervalues their investment.

In Plain English

Appraisal rights let you say "I don't accept your buyout price—let a judge decide what my shares are really worth." You refuse the merger payment, file a lawsuit, and the court determines fair value. You might get more than the deal price (arbitrage), or you might get less (it's risky).

How Appraisal Rights Work

  1. Merger announced: Company agrees to be acquired
  2. Shareholder dissents: Does NOT vote in favor of the merger
  3. Perfection: Files written demand for appraisal before vote
  4. Merger closes: Dissenting shareholder doesn't receive merger consideration
  5. Court petition: Shareholder files petition within 120 days
  6. Fair value determined: Court determines fair value after trial
  7. Payment: Shareholder receives court-determined value plus interest

The Fair Value Standard

Delaware courts determine fair value as:

  • The value of the company as a going concern
  • At the time of the merger
  • Exclusive of any value from the merger itself (synergies)
  • Considering all relevant factors

Fair value is NOT necessarily the deal price—it could be higher or lower.

The Dell Case: A Turning Point

Background

When Dell went private in 2013 at $13.75/share, shareholders holding ~$4 billion in stock sought appraisal, betting they could get a higher value.

Court of Chancery Ruling

  • Relied on DCF analysis
  • Determined fair value of $17.62/share (28% premium over deal price)
  • Rejected deal price as reliable indicator

Supreme Court Reversal (2017)

The Delaware Supreme Court reversed, holding:

  • The lower court erred in ignoring market evidence
  • Dell's stock was efficiently traded
  • The sales process was robust
  • Deal price is often the best evidence of fair value

This decision significantly changed appraisal litigation.

The Rise and Fall of Appraisal Arbitrage

The Arbitrage Strategy (Pre-2017)

  1. Buy shares after merger announcement
  2. Seek appraisal
  3. Hope court awards premium over deal price
  4. Collect interest on unpaid amount during litigation

Why It Collapsed

  • DFC Global (2017): Courts should give weight to deal price
  • Dell (2017): Efficient market + good process = deal price is fair
  • Aruba (2019): Unaffected stock price may be fair value
  • Result: Appraisal awards rarely exceed deal price now

Statistics: Average appraisal returns dropped from 98% (2000-2014) to 13% (2015-2019).

When Appraisal Rights Apply

Delaware Requirements (DGCL §262):

  • Cash mergers: Where shareholders receive only cash
  • Not publicly traded exception: Listed companies with liquid markets often excluded
  • Procedural compliance: Strict requirements must be followed

Market-Out Exception

Shareholders generally do NOT have appraisal rights if:

  • Stock was listed on national exchange
  • More than 2,000 shareholders
  • Consideration is shares of surviving company

This exception limits appraisal to cash-out mergers of illiquid companies.

Procedural Requirements (Delaware)

Appraisal rights are easily lost. Requirements include:

  1. Continuous ownership: Hold shares through merger closing
  2. No vote in favor: Must not vote for the merger
  3. Written demand: Submit before shareholder vote
  4. Don't accept payment: Refuse the merger consideration
  5. Court petition: File within 120 days of merger closing
  6. Strict compliance: Missing any step = rights lost

Strategic Considerations

For Dissenting Shareholders:

  • Litigation cost: Trials are expensive
  • Uncertainty: May get less than deal price
  • Time value: Proceedings take years
  • Interest: Typically receive interest during litigation
  • Expert costs: DCF battles require expensive experts

For Acquirers:

  • Appraisal liability: May owe more than deal price
  • Cash management: Must reserve for potential awards
  • Process protection: Robust sale process = better defense

Post-Dell Landscape

Today's appraisal reality:

  • Courts heavily weight deal price when process was fair
  • Arbitrage strategy is largely dead
  • Appraisal petitions have declined significantly
  • Remaining cases often involve conflicted transactions

Practical Takeaways

For shareholders: Appraisal rights are a legitimate remedy if you genuinely believe a deal undervalues the company, but post-2017 case law makes winning difficult. Don't expect courts to award premiums over deal price unless the sale process was flawed.

For acquirers: A robust, conflict-free sale process is your best protection against appraisal claims. Document the process thoroughly. If appraisal claims are filed, deal price will likely be the floor—and often the ceiling.

Related Terms

Squeeze-Out Merger

M&A

Fiduciary Duty

Corporate Governance

Tender Offer

M&A

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