Saturday, March 14, 2020
For the last several weeks, Xerox has been pursuing a takeover over HP. At first, its overtures were friendly, and more recently it turned hostile (well, sort of hostile). It has put the campaign on hold in light of the pandemic – it says, because it is unsafe to travel and conduct meetings with shareholders – but before that, it filed a Schedule TO and an S-4 with the details of the offer. As relevant here, the S-4 explains that Xerox is proposing a tender offer followed by a second-step merger under DGCL 251(h). Shareholders who do not tender their shares, and thus are merged out, will receive the same consideration as shareholders who tender. Which is:
That said, Xerox plans to pay a total of $27,326,000,706 in cash. Therefore, if shareholders’ elections would result in a different figure, these elections are capped:
In other words, shareholders have a choice of whether they receive stock, cash, or a combination of both, but only up to a point; if too many shareholders select one or the other, Xerox will rebalance.
Which brings us to the right of appraisal. According to the S-4:
So, what’s the law on this? Delaware provides that public company shareholders who lose their shares in the second-step of a 251(h) merger are entitled to appraisal if they are “required by the terms of an agreement of merger or consolidation… to accept for such stock anything except” public company shares. See DGCL 262. In other words, cash consideration gets you appraisal; public company stock consideration does not. And, per Delaware caselaw, a combination of the two entitles shareholders to appraisal. See Louisiana Municipal Police Employees’ Retirement System v. Crawford, 918 A.2d 1172 (Del. Ch. 2007).
Where does Xerox’s offer fit?
On first glance, it doesn’t require anyone to accept anything; HP shareholders can choose stock, cash, or a combination of the two. Thus, according to at least once Delaware decision, appraisal should be unavailable. See Krieger v. Wesco Financial Corp., 30 A.3d 54 (Del. Ch. 2011).
But wait! Xerox contemplates that some shareholders might be required to accept cash, if it turns out that too many elect stock. We don’t know yet whether that will happen, and so Xerox is assuming that there will be appraisal rights. Which could mean that even if everyone makes the exact right election, no one is forced to accept any particular combination of cash or stock, second-step shareholders could still seek appraisal no matter what they elected, simply because of the ex ante possibility that some shareholders might have been required to accept cash. Cf. Krieger (appraisal is unavailable where “[t]he merger agreement did not contemplate proration or impose any cap on the number of shares available for individual stockholders or the class as a whole.”)
Is that the law? Maybe. Or maybe appraisal is only available if Xerox pulls the trigger and actually does force some shareholders to accept cash. Or maybe appraisal is only available to those particular shareholders who elected stock and were forced to accept cash, but not to shareholders who elected cash and received it. But cf. Krieger (“The General Corporation Law in fact makes appraisal rights available on a transactional and class-wide (or series-wide) basis. Stockholders can choose individually whether to perfect and pursue their appraisal rights, but the underlying statutory availability of appraisal rights is not a function of individual choice.”)
We don’t know!
Now, that in itself is not shocking; lots of times you have a statute and it covers some scenarios but not others and caselaw fills in the gaps. And when there’s a question of first impression, lawyers step in and use a combination of arguments based on statutory language, precedent, and policy to persuade the court to go their way.
But here’s where Delaware law fails us. As I’ve previously argued, there is no policy. The appraisal statute is a mess; there is no clear reason why Delaware permits appraisal in the first place, let alone why it distinguishes between public company stock and cash. To quote, ahem, me:
[Appraisal] can’t just be about liquidity because it applies to publicly-traded stock, it can’t just be about conflict transactions because it’s available in nonconflict transactions – even if it’s more available in 90% controller squeezeouts – and the distinction Delaware draws between receipt of cash versus receipt of publicly traded stock is incoherent. See Charles Korsmo & Minor Myers, Reforming Modern Appraisal Litigation, 41 Del. J. Corp. L. 279 (2017). It’s a Frankenstein’s monster of different impulses that act at cross-purposes.
That’s why we’ll never see agreement on how to reform the current system, and it’s also why it’s unclear how the Xerox/HP merger should be treated under existing law. One of the critical tools we use to make these kinds of predictions – a functional analysis of the purposes behind the statutory scheme – is entirely absent; it’s a crap shoot.
My point is, this is no way to run a railroad. I know Delaware has contemplated reforms to its appraisal statute and methodology but before we can see movement on that score, Delaware needs to answer the fundamental question of why we have appraisal in the first place. From that, everything else will (mostly) follow.