Tuesday, May 8, 2007
On May 2, 2007, Chancellor William B. Chandler of the Delaware Chancery Court issued an opinion in the appraisal rights proceeding arising from Transkaryotic Therapies' acquisition by Shire Pharmaceuticals (see a news report here). Approximately 34.6 percent of Transkaryotic shareholders have sought such appraisal rights. The issue before the court was "whether under 8 Del. C § 262 [Ed. Note: the Delaware appraisal statute] a beneficial owner, who acquires shares after the record date, must prove that each of its specific shares for which it seeks appraisal was not voted in favor of the merger?" After a short analysis, the court answered the question in the negative. It stated, "under the literal terms of the statutory text and under longstanding Delaware Supreme Court precedent, only a record holder, as defined in the DGCL, may claim and perfect appraisal rights. Thus, it necessarily follows that the record holder’s actions determine perfection of the right to seek appraisal." Accordingly, TKT's attempts to "examine relationships between Cede (the record holder) and certain non-registered, beneficial holders in order to determine the existence of appraisal rights" were inappropriate as a matter of law. Chancellor Chandler stated that, "[a] corporation need not and should not delve into the intricacies of the relationship between the record holder and the beneficial holder and, instead, must rely on its records as the sole determinant of membership in the context of appraisal."
Applying the holding to the facts of the case here, Cede was the record holder of 29,720,074 shares of TKT. It voted 12,882,000 shares in favor of the merger and 16,838,074 against, abstained, or not voted in connection with the merger. The court stated that it was uncontested that "Cede otherwise properly perfected appraisal rights as to all of the 10,972,650 shares that petitioners own and for which appraisal is now sought." Accordingly, the court held that since the "actions of the beneficial holders are irrelevant in appraisal matters, the inquiry ends here." The decision means that the appraisal rights proceeding will proceed and Shire will continue to have substantial liability exposure due to the high number of dissenting shareholders here.
Over at the Harvard Law School Corporate Governance Blog, Lawrence Hamermesh, a well-known professor at Widener University School of Law, has some nice commentary on the decision. In a post worth quoting from extensively, Professor Hamermesh states:
The Chancellor acknowledges the policy concern expressed by TKT: namely, that this reading of the law would “pervert the goals of the appraisal statute by allowing it to be used as an investment tool for arbitrageurs as opposed to a statutory safety net for objecting stockholders.” As to this objection, the Chancellor embraced a conservative view of the judicial role: he invited legislative attention to “the evil, if it is an evil.”
How “evil” or “good” this ruling proves to be may depend in significant part on the ultimate resolution of the valuation issue. At this point, I’m not deeply troubled. As Michael Wachter and I noted in The Short and Puzzling Life of the “Implicit Minority Discount” in Delaware Appraisal Law (at pages 44-45, forthcoming in the University of Pennsylvania Law Review), one would ordinarily expect the purchase price in an arm’s-length acquisition to exceed the “fair value” to be awarded in appraisal litigation--in which “fair value” must, according to settled judicial interpretation of 8 Del. C. § 262(h), exclude synergistic merger gains.
Accordingly, there should ordinarily be no incentive for arbitrageurs to use the appraisal remedy “as an investment tool,” since those who seek appraisal under Delaware law have to refrain from receiving even the merger price itself until the conclusion of the appraisal proceeding.