The Death of Appraisal Arbitrage: Ending Windfalls for Deal Dissenters

Abstract

In this article, we take note of a new and positive development in Delaware's law of appraisal: more robust enforcement of Section 262(h), which expressly excludes from fair value in appraisal litigation the value that is uniquely associated with the deal from which the shareholders seeking appraisal are dissenting. For public firms, this implies that deal dissenters are entitled to no more than the price that prevailed prior to the deal's announcement.

In a salutary development, the Delaware Chancery Court took this approach in its recent appraisal decision in Verition Master Fund Partners, Ltd. v. Aruba Networks, Inc., awarding to the deal dissenters the pre-announcement price and striking a blow against "appraisal arbitrage"—a trading and litigation strategy that is predicated on deal dissenters receiving appraisal remedies in excess of the deal prices from which they dissent.

We explore here the historical and economic rationales for limiting the appraisal remedy in this fashion. And we conclude with some recommendations for ending or limiting appraisal windfalls in the context of private firms as well via contractual and corporate bylaw valuation mechanisms that would replace judicial with market valuation in appraisal litigation as well as select litigation fora that would be amenable to enforcement of such mechanisms.