Bar Association Appraisal Measures Headline DGCL Amendment Package

Tom McParland, Delaware Law Weekly
April 6, 2016

At the heart of this year's proposed amendments to the Delaware General Corporation Law were the Delaware State Bar Association's long-discussed measures aimed at addressing the rising tide of appraisal actions in the Court of Chancery.

The proposals were part of last year's annual package to be approved by the General Assembly. But amid a push to limit a key holding in a 2014 Delaware Supreme Court decision, ATP Tour v. Deutscher Tennis Bund, the bar association tabled the amendments until they could get a fuller hearing by the General Assembly.

"Rather than doing two controversial things in one session, I think the idea was to just let the appraisal [proposals] simmer a little bit," said Lawrence Hamermesh, a member of the DSBA's corporation law section, which is responsible for drafting the yearly amendments.

Now, two ideas in particular are coming to the fore, some attorneys said, in a package of what council members described as otherwise "moderate" measures.

The first would limit the right to bring appraisal actions against publicly traded companies if the claim is de minimis, or too insignificant to warrant judicial scrutiny.

Under the proposed amendments, the court could dismiss appraisal proceedings if the total number of shares entitled to appraisal falls below 1 percent of the outstanding shares eligible for appraisal or if the value of the merger consideration for the shares does not exceed $1 million.

But another appraisal measure is garnering attention for its potential to curb the controversial—and increasingly prevalent—practice of appraisal arbitrage by allowing corporations to pay stockholders pursuing appraisal claims at any time before a final judgment is entered by the court.

Appraisal arbitrageurs typically buy up shares with appraisal rights just after a merger is announced in the hope of collecting a generous appraisal award, with interest. Currently, no payment may be made until a final award is entered by the court; meanwhile, interest on the shares runs from the effective date of the merger, compounded quarterly at 5 percent over the Federal Reserve discount rate.

The proposed amendment would cut off the accrual of interest, which would only accrue on the difference between the amount paid and the fair value as determined by the court and on any interest already accrued, if it was not paid by the corporation.

Francis G.X. Pileggi, a corporate and commercial litigator with Eckert Seamans Cherin & Mellott, said a rise in appraisal actions over the past five years and the increased clout of appraisal arbitrageurs had raised "major concerns" among some in the bar, and the proposed changes to the DGCL were long overdue.

"Most observers think these were corrections that should have been done a long time ago," he said.

The Chancery Court itself has also expressed frustrations as appraisal actions have taken up a larger portion of its docket.

In the 2015 case Merion Capital v. BMC Software, Vice Chancellor Sam Glasscock III said appraisal actions have "become a common scenario in this court," and he chided the petitioners, calling them "arbitrageurs who bought, not into an ongoing concern, but instead into this lawsuit."

The result, he said, was a drawn-out lawsuit that put the court in the position of determining the fair value of shares.

In 2014, Glasscock also addressed the issue in a letter opinion in Huff Fund Investment Partnership v. CKx. In that case, the respondent asked the vice chancellor to order the petitioner to accept a payment in order to cut off the running of interest.

Glasscock, who saw the "potential utility of such an approach," declined to do so, noting that the existing statutes in the DGCL limited the court's authority in that regard. Still, he identified the need for lawmakers to revisit the law.

"I note that, compared with fault-based litigation, the opportunities for rent-seeking in appraisal actions are comparatively high; therefore, factors that tend to create perverse litigation incentives in these actions deserve close consideration by policy makers," he said.

It is unclear to what extent statutory interest plays in incentivizing appraisal actions, but studies have cited it as a factor, along with earlier rulings in favor of appraisal arbitrageurs and a perception that the Court of Chancery is more inclined to find fair values above the transaction price.

If approved, an amendment allowing corporations to cut the accrual of interest would both disincentive appraisal arbitrage and perhaps provide some insight into the causes that are driving the practice in Delaware, said Matthew J. O'Toole, chair of the corporation law section.

"To the extent the interest rate is an incentive to bring a claim, this tool … would remove the interest rate as the incentive to bring a claim," O'Toole said, noting that the amendment would apply to all appraisal proceedings and not just cases involving appraisal arbitrage.

In other areas of corporation law, O'Toole said a number of proposed changes to the DGCL would bring greater "certainty and clarity" to certain statutes, based on recent court decisions, trends and input from the bar.

For instance, another set of proposed amendments would make technical changes to Section 251(h), which governs short-form mergers, a fairly common method where a parent corporation merges with its own subsidiary company.

The amendments would extend the subsection to apply to corporations that have any class or series stock listed on a national securities exchange or held of record by more than 2,000 holders just before a merger agreement, even if not all of the corporation's stock is listed or held.

It would also include rollover stock—and shares of stock held by direct and indirect parent entities and their wholly owned subsidiaries—for the purpose of calculating whether an offeror has sufficient shares to approve the merger.

An amendment to Section 111 would also give the Court of Chancery concurrent jurisdiction with the Superior Court over civil actions involving an offer or sale of the stock, property or assets of a Delaware corporation. The provision would give parties the option to opt out of the Superior Court in favor of a venue they are more familiar with.

Other proposed amendments to the DGCL include measures to address quorum and voting requirements of a board and its subcommittees, a mechanism to restore a corporation's certificate of incorporation after it expires by limitation, as well as other procedures for revoking dissolution and reviving a certificate of incorporation after it has become forfeited or void.

Corporation law section members were set to formally vote on the amendments Tuesday. From there, the proposals would go to the DSBA executive committee for approval, likely during its scheduled meeting April 21.

O'Toole said that timeline would give the General Assembly two months to act before the legislative session ends in late June.

Tom McParland can be contacted at 215-557-2485 or at tmcparland@alm.com. Follow him on Twitter @TMcParlandTLI.