Wednesday, March 18, 2015
Usually amendments to the corporate law are pretty sleepy affairs. This year is different. There's anti-fee-shifting legislation, In the slew of amendments generating interest this year, there's the new Chancery facilitated arbitration procedure, and then there are the amendments to the appraisal statute. If you would have told me two years ago that arbitration would be the least controversial of all the amendments, I would have laughed at you, but there you have it.
The amendments to the appraisal statute (262 Appraisal) come in response to the rise in appraisal arbitrage. There are a number of important changes to the way Section 262 operates. First, the amendment follows what is common practice in other states by setting a floor with respect to appraisal petitions before getting access to the remedy. Going forward, stockholders will only be entitled to an appraisal if all the shares seeking an appraisal exceed 1% of the outstanding shares or at least $1 million in merger consideration. In any event a transaction done pursuant to Sections 253 and 267 would always have appraisal rights.
To give you a sense of what this floor means, Dell generated valid petitions for only 2% of the stockholders - though the value of the merger consideration would have easily exceeded $1 million. The floor makes sense and will likely get rid of nuisance litigation to the extent there is any nuisance appraisal litigation. I don't think that's a real problem, but I suppose if you are going in to tinker, you might as well tinker.
Of larger import, is the amendment that permits the acquirer to pay some portion of the consideration immediately and stop the accruing of interest on the amount paid, leaving interest to accrue only on the amounts still in controversy. Because of the statutory interest rate, that one change might go quite a way to reducing some incentives for hedge funds to pursue appraisal arbitrage as a business. In CKx, defendants made a motion to require petitioners to accept the uncontested portion of the merger consideration in order to stop the clock on the accrual of interest. Vice Chancellor Glasscock refused to issued such an order. However, this amendment would explicitly permit that maneuver.
These changes may not go far enough for some - who were seeking things like stock tracing. Stock tracing would require the beneficial holder to prove that she was a beneficial stockholder prior to announcement of the merger. Right now, so long as the record holder was a holder prior to the merger, the beneficial holder need not establish that they were owners prior to the announcement of the merger. This is a loophole that appraisal arbs have driven trucks through.
Dole has complained that the changes are too timid and is pushing Delaware to go further. Indeed, Dole is even threatening to "pull out of Delaware" if it doesn't do more to eliminate appraisal arbs. Frankly, it's a ridiculous threat that I would have thought Delaware legislators would be sophisticated enough to discount. The inference is that if Delaware doesn't eliminate the appraisal arb business through stock tracing, that Dole would close its shipping business in Delaware. Umm. Okay. Hard to see how the two are related. If they close that business they will do so for business reasons, not because of the appraisal statute. If Dole means it will reincorporate elsewhere. Ok, where? Have fun.
Anyway, it's going to be a more interesting summer than previously thought in Wilmington.