Sunday, October 24, 2010
George Geis has posted his new paper, An Appraisal Puzzle, on SSRN. It's forthcoming in the NW. L. Rev. It deals with the issue of how the problem of identity ambiguity means that almost anyone can seek appraisal. Since appraisal statutes only deal with record holders, beneficial holders can still get appraisal, even if they voted in favor the transaction in question. This is a sticky issue!
The division of power between majority and minority shareholders raises a fundamental tension for corporate law scholars. Awarding minority owners too much say can hinder effective decision making and introduce holdout problems. But naked majority rule only breeds a different malady by handing controlling shareholders the power to steal from minority owners. This governance conflict plays out in a variety of contexts but presents itself most explicitly during freezeout mergers.
Appraisal rights are a statutory attempt to deal with this problem. These laws do not directly prevent freezeouts; rather, they impose a liability rule where minority holders can demand fair value for their shares when they object to a deal. Unfortunately, this remedy functions rather poorly, and legal scholars have mostly scoffed at appraisal rights for the last half-century.
Interestingly, however, several recent developments in the back offices of Wall Street and the courthouses of Delaware have created a new appraisal puzzle. The problem relates to identity ambiguity. Appraisal statutes are written to cover record holders (the direct owners listed on a firm’s books). Yet under modern securities settlement practices the identity of these clearinghouse owners no longer changes during the sale of stock. And recent precedent now permits beneficial owners (the real investors) to obtain appraisal even if they purchase shares after voting rights on the merger have been severed from the stock. This introduces what I will call amplified appraisal claims, where a large number of investors can seek appraisal - each insisting that they have claim to a smaller pool of “qualified” shares. Such a development has the potential to turn the dynamics of a freeze-out merger on its head. This Article describes the appraisal identity puzzle, analyzes the theoretical implications for majority and minority shareholders, and proposes a normative response.