Friday, September 21, 2007
On Wednesday, Crescendo Partners announced in a press release that it would elect to exercise appraisal rights with respect to its 6.9% share ownership in Topps. I noted yesterday that Crescendo's action might spur other shareholders to exercise appraisal rights in this deal. The reason why is that unlike entire fairness litigation in Delaware, which is typically contingency fee based, shareholders in appraisal proceedings shareholders must front the costs. This creates a collective action problem among others -- shareholders, particularly smaller ones, do not want to bear these expenses, do not have the wherewithal to bring an appraisal action and are unable to coordinate their actions to do so. I wrote yesterday that this is a problem ameliorated in the Topps deal now since shareholders know Crescendo will be bearing some, if not all, of these costs. The consequence may be a higher than ordinary number of shareholders exercising appraisal rights. And, the Topps merger agreement is conditioned on no more than 15% of shareholders exercising appraisal rights, so if a sufficient number exercise these rights it will give Eisner's Tornante Company and Madison Dearborn Partners a walk right and put the deal in jeopardy. Topps shareholders opposed to this deal now have an incentive to exercise their rights in order to attempt to crater it.
There is another factor here which may raise the number of shareholders asserting appraisal rights: The recent Delaware decision in In re: Appraisal of Transkaryotic Therapies, Inc. (access the opinion here; see my blog post on it here). This case held that investors who buy target company shares after the record date and own them beneficially rather than of record may assert appraisal rights so long as the aggregate number of shares for which appraisal is being sought is less than the aggregate number of shares held by the record holder that either voted no on the merger or didn’t vote on the merger. As Chancellor Chandler stated:
[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.
The court ultimately held that since the "actions of the beneficial holders are irrelevant in appraisal matters, the inquiry ends here." [NB. most shareholders own their shares beneficially rather than of record with one or two industry record-holders so this decision will apply to almost all shares held by Topps and in fact any other public company]
Post-Transkaryotic a number of academics and practitioners raised the concern that this holding would encourage aggressive investors (read hedge funds) to create post-record date/pre-vote positions in companies in order to assert appraisal rights with respect to their shares. This would be particularly the case where the transaction was one being criticized for a low offered price.
Topps appears to be a good candidate for this strategy. The price offered by Michale Eisner's consortium has been criticized extensively for being too "low" and led a number of proxy service firms to recommend against the merger. In addition, the record date on the transaction was August 10, which provided a long period for investors adopting this strategy to purchase their shares. Ultimately, it appears that we are watching the first test of the Transkaryotic opinion. It will be interesting to see whether the potential concerns raised by this decision come to pass. And perhaps food for thought for the Delaware Supreme Court if, and when, it ever considers the holding of the Transkaryotic case.