Two amendments intended to scale back Delaware "appraisal
arbitrage" proceedings came into effect on August 1.
What You Need To Know
Appraisal proceedings now must meet
Corporations can prepay dissenting
shareholders in order to limit the accrual of interest on a fair
The amendment to section 262(g) of the Delaware General
Corporation Law (DGCL) eliminates de minimis actions. The
new law permits appraisal rights proceedings only if more than 1%
of the outstanding shares are eligible for appraisal or the value
of eligible shares exceeds US $1 million. Proceedings can also go
forward for short-form mergers pursuant to sections 253 or 267 of
the DGCL. One estimate suggests these new thresholds will reduce
the number of appraisal proceedings by as much as 25%.
The second amendment, to DGCL section 262(h), is intended to
reduce the amount of interest available on a "fair value"
award. Under the DGCL, interest accrues from the effective date of
the merger through the payment date of the award at 5% over the
Federal Reserve discount rate, compounded quarterly. This interest
rate provides a financial incentive for shareholders to exercise
appraisal rights, including an incentive to "buy into" a
merger merely to exercise appraisal rights. Previously, surviving
corporations could make a voluntary payment to shareholders seeking
an appraisal remedy in order to prevent interest from accruing on
the amount prepaid, but the shareholders were not required to
accept the payments. The amendment addresses this by entitling the
surviving corporation to make a prepayment, in which case interest
will accrue only on the sum of (i) the difference, if any, between
the amount paid and the fair value of the shares as determined by
the Court of Chancery, and (ii) any interest accrued before the
prepayment, unless such interest is paid as part of the prepayment.
The new prepayment rule is expected to reduce appraisal
These amendments arrive on the heels of a remarkable appraisal
decision in May 2016, In re: Appraisal of Dell Inc., in
which the Court of Chancery determined that the fair value of Dell
shares was nearly 30% greater than the price paid in connection
with a 2013 management buyout. The court did so despite finding
that the company's sale process would "sail through"
enhanced scrutiny and that the board's special committee did
"many praiseworthy things" to maximize value for
Dell's shareholders. The interest portion of the trial award
Critics of the Dell decision have expressed concern
that it will further encourage the practice of appraisal arbitrage,
which will hurt public shareholders as prospective buyers seek to
offset the risk of appraisal awards with lower offers or by
remaining on the sidelines altogether. The recent amendments are
likely to blunt the impact of the Dell decision.
In Canada, there is less need to address the potential impact of
appraisal arbitrage. In some jurisdictions, shareholders cannot
"buy into" many M&A transactions to exercise dissent
rights since that right is restricted to shareholders who held
shares as of the record date for the shareholder meeting.
In addition, interest on the amounts awarded to shareholders
exercising dissent rights and seeking fair value is at the
discretion of the court and, therefore, interest does not provide
the same incentive that it does in Delaware. Finally, while
Canadian corporate statutes do not include a de minimis
threshold for the exercise of dissent rights, many jurisdictions
have a "loser pays" costs rule, which may operate, in
effect, as a gatekeeping mechanism to preclude small shareholders
from exercising dissent rights.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).