October 30, 2007
Applebee's and the New, New Thing: Appraisal Rights
The Applebee's shareholder meeting to vote on its acquisition by IHOP is today at 10:00 a.m. (Kansas time). The meeting will be held at the Doubletree Hotel, 10100 College Blvd., Overland Park, Kansas 66210 for those who wish to attend (pancakes anyone?). The vote is likely to be a close one. Applebee's senior management, which holds about 5.1% of the company's shares, is probably going to vote against the transaction; they previously voted against it on the company's board. Burton "Skip" Sack, Applebee's largest individual shareholder, with about 3.2% of the stock, has also exercised his dissenter's rights and filed for an appraisal proceeding in Delaware Chancery Court if the transaction goes through. Sowing some confusion, the proxy services have split on the deal. Institutional Shareholder Services and Glass, Lewis & Co. favor the deal; Proxy Governance and Egan-Jones Proxy Services are against it.
Sack's exercise of appraisal rights is the third such maneuver in a troubled deal in recent months. Crescendo Partners exercised appraisal rights in the acquisition of Topps by Michael Eisner's Tornante and MDP Partners with respect to 6.9% of the total number of outstanding Topps shares. And Mario Gabelli's GAMCO exercised appraisal rights in the failed Cablevision take-private with respect to 8.25% of the total number of outstanding Cablevision shares.
I would expect these events to happen more often as institutional and other significant investors flex their muscles in troubled deals. In addition, exercising appraisal rights sets up the investor nicely If no one else has exercised appraisal rights. There will now be no free-rider problem or multiple litigants for the dissenter to negotiate with. Instead, it can now negotiate a private one-on-one deal with the buyer as to the purchase price for its shares under the shadow of its appraisal rights litigation. This is a benefit typically unavailable to the average shareholder who cannot afford the litigation expenses and free rider problems of appraisal rights. Of course, this highlights the problems of appraisal rights generally in Delaware.
Note, the Wall Street Journal Deal Journal noted this trend last week in a post and incorrectly attributed it to 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 Applebee's 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. [NB. Lawrence Hamermesh, a well-known professor at Widener University School of Law, disagreed with such thoughts on the Harvard Law School Corporate Governance Blog].
But the Wall Street Journal was incorrect to attribute the emergent trend of appraisal rights to Transkaryotic since in the three cases above we are not dealing with an arbitrage or post-record date acquisition exercise of appraisal rights. Here, the exercise of appraisal rights were by long-term shareholders who have not been effected (or even aided) by the Transkaryotic decision.
Still, it will be interesting to see what will happen in the Applebee's transaction and whether the strategy hypothesized in Transkaryotic will come to pass. It didn't happen in either Topps or Cablevision but perhaps we will be third time lucky. Applebee's, after all, is the perfect situation for such an exercise.
Practice Point: Given the rise in appraisal rights, buyers would do well to include an appraisal rights condition in their merger agreement which conditions the closing on no more than x% of the shareholders dissenting from the transaction. Topps and Cablevision had the provision, Applebee's does not. By not including it, IHOP has risked a situation similar to what occurred in Transkaryotic. There approximately 34.6 percent of Transkaryotic shareholders sought appraisal rights. Yikes.
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