Appraisal arbitrage cases have been around for years but they have become more common lately, led by hedge funds looking to profit from mergers and acquisitions. In an “appraisal arbitrage”, investors in a company vote against a proposed deal and then appeal to a judge to determine and award them the statutory fair value of the stock after the deal has closed. In recent years, a number of hedge funds have seen the opportunity to accumulate shares of a company on the eve of a buyout and attempt to profit from this strategy. When the court takes up the matter, the judge’s final decision becomes the price paid to those involved in the lawsuit – and this price (statutory fair value) could be higher or lower than the agreed upon merger price.
Statutory fair value is the standard of value for valuation in the dissenters’ rights and shareholder oppression statutes of the majority of states. The nuances of statutory fair value are beyond the scope of this post, but this whitepaper contains an extensive discussion of the topic. In short, however, disagreements over the applicability (or not) of certain valuation premiums or discounts often represent the source of significant differences of opinion regarding the value of shares in these matters.
In the context of appraisal arbitrage, one recent victory for dissenting shareholders (and their hedge fund backers) involves the $7.6 billion sale of Safeway Inc. to Albertsons in early 2015. As part of a settlement, the dissenting shareholders will receive $44.00 per share versus the original deal price of $34.92. The remainder of the shareholders who did not bring the lawsuit will receive the original price. One study cited in a 2014 article in the Wall Street Journal noted that approximately 80% of Delaware appraisals that went to trial since 1993 have resulted in high prices for dissenting shareholders.
Appraisal arbitrage cases do not always result in a higher price for dissenters, however. Though history suggests that most cases have yielded higher values, instances of the court-determined prices being equal to the original merger price and even lower are not rare. One peculiar example involves the Cypress Semiconductor acquisition of Ramtron International Corporation in 2012. In June 2015, a Delaware judge found that Cypress had factored expected synergies of roughly three cents per share into their acquisition price. Under the Delaware Code, however, statutory fair value is to be calculated “exclusive of any element of value arising from the accomplishment or expectation of the merger or consideration.” As a result, the judge ruled that the dissenting shareholders should receive $3.07 per share versus the original $3.10 consideration.
Even for cases in which the dissenters fail to achieve a higher price or simply have to settle for original merger value, investors may still come out ahead due to accumulated interest on their claims, which have been observed to be as high as 5.75% in some cases. Other current cases working their way through the courts include buyouts of PetSmart Inc., Dole Food Company, and Zale Corporation. We will continue to monitor the developments in these cases.
To discuss a valuation matter involving appraisal arbitrage or statutory fair value in confidence, please contact a Mercer Capital professional.