The Wall Street Journal, November 22, 2013 article: Funds engaging in "appraisal arbitrage" identified in recent filings

Fortress Investment Group LLC is the mystery holder of about 2.8 million shares of Dole Food Co., according to people familiar with the matter, and is one of at least three large investors asking a judge to award them more per share than Dole's CEO paid to take the company private earlier this month.

The people said Fortress is the parent of Ripe Holdings LLC, which filed a lawsuit in Delaware court last week demanding an appraisal of Dole Food shares. Fortress is a publicly traded asset manager known mostly for distressed lending, with about $58 billion in assets as of Sept. 30.

Hudson Bay Capital Management LP, which owns 3.6 million Dole shares across two of its funds, is suing alongside Fortress, according to a court filing. A third hedge fund, Merion Capital LP, filed a separate claim for appraisal of its 7.5 million shares, a court filing shows.

In all, holders of nearly 14 million shares, more than 25% of all Dole shares not owned before the buyout by CEO David Murdock, are seeking more money in court. That makes Dole's one of the largest appraisals ever in Delaware, where most such suits are brought, according to a review of court filings.

Mr. Murdock paid $13.50 per share to take the California-based fruit producer private. The deal, valued at $1.2 billion, closed Nov. 1.

Appraisal is a legal proceeding in which dissenting stockholders in a cash-out merger can ask a judge to determine the fair value of their shares. Both sides submit dueling valuations, and a judge can choose one or decide upon another.

So-called appraisal arbitrage, where hedge funds buy up shares of companies on the brink of a buyout and seek appraisal, has emerged as a popular investment strategy. At least 20 deals have drawn appraisal claims in Delaware court this year. Before that fewer than five was more typical.

A 2007 court ruling opened the door to more appraisals when it allowed investors to claim appraisal on shares they acquired after a deal's record date, the date that determines which shareholders are entitled to vote on a deal. By letting firms come into the stock and seek appraisal after the record date, the decision lowered the risk that the vote on the deal would fail, as record-date holders who want to seek appraisal must vote no. The shift also gave investors time to review financial information that is often published after a record date is set.

Low interest rates have helped popularize appraisals, too. Investors are guaranteed interest on their claims of 5% above the federal funds rate, whether they win or not. The risk for investors is that shares are appraised below the deal price; also, appraisal litigation can take years, tying up investors' money in the meantime.