The Long Rise and Quick Fall of Appraisal Arbitrage
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Vanderbilt University Law School Scholarship@Vanderbilt Law Vanderbilt Law School Faculty Publications Faculty Scholarship 2020 The Long Rise and Quick Fall of Appraisal Arbitrage Randall S. Thomas Vanderbilt University Law School Wei Jiang Columbia Business School Tao Li Warrington College of Business, Univ. of Florida Follow this and additional works at: https://scholarship.law.vanderbilt.edu/faculty-publications Part of the Marketing Law Commons, and the Securities Law Commons Recommended Citation Randall S. Thomas, Wei Jiang, and Tao Li, The Long Rise and Quick Fall of Appraisal Arbitrage, 100 Boston University Law Review. 2133 (2020) Available at: https://scholarship.law.vanderbilt.edu/faculty-publications/1181 This Article is brought to you for free and open access by the Faculty Scholarship at Scholarship@Vanderbilt Law. It has been accepted for inclusion in Vanderbilt Law School Faculty Publications by an authorized administrator of Scholarship@Vanderbilt Law. For more information, please contact [email protected]. DATE DOWNLOADED: Thu Feb 18 09:40:13 2021 SOURCE: Content Downloaded from HeinOnline Citations: Bluebook 21st ed. Wei Jiang, Tao Li & Randall Thomas, The Long Rise and Quick Fall of Appraisal Arbitrage, 100 B.U. L. REV. 2133 (2020). ALWD 6th ed. Jiang, W.; Li, T.; Thomas, R. ., The long rise and quick fall of appraisal arbitrage, 100(6) B.U. L. Rev. 2133 (2020). APA 7th ed. Jiang, W., Li, T., & Thomas, R. (2020). The long rise and quick fall of appraisal arbitrage. Boston University Law Review, 100(6), 2133-2178. Chicago 17th ed. Wei Jiang; Tao Li; Randall Thomas, "The Long Rise and Quick Fall of Appraisal Arbitrage," Boston University Law Review 100, no. 6 (December 2020): 2133-2178 McGill Guide 9th ed. Wei Jiang, Tao Li & Randall Thomas, "The Long Rise and Quick Fall of Appraisal Arbitrage" (2020) 100:6 BU L Rev 2133. AGLC 4th ed. Wei Jiang, Tao Li and Randall Thomas, 'The Long Rise and Quick Fall of Appraisal Arbitrage' (2020) 100(6) Boston University Law Review 2133. MLA 8th ed. Jiang, Wei, et al. "The Long Rise and Quick Fall of Appraisal Arbitrage." Boston University Law Review, vol. 100, no. 6, December 2020, p. 2133-2178. HeinOnline. OSCOLA 4th ed. Wei Jiang and Tao Li and Randall Thomas, 'The Long Rise and Quick Fall of Appraisal Arbitrage' (2020) 100 BU L Rev 2133 Provided by: Vanderbilt University Law School -- Your use of this HeinOnline PDF indicates your acceptance of HeinOnline's Terms and Conditions of the license agreement available at https://heinonline.org/HOL/License -- The search text of this PDF is generated from uncorrected OCR text. -- To obtain permission to use this article beyond the scope of your license, please use: Copyright Information THE LONG RISE AND QUICK FALL OF APPRAISAL ARBITRAGE WEI JIANG,* TAO Li** & RANDALL THOMAS** ABSTRACT Appraisal is a legislatively created right for shareholders to seek a judicial determination of the fair value of their stock in certain transactions. For many decades, appraisal was a little-used and frequently maligned corporate law remedy. Beginning at the turn of the twenty-first century, this all changed when a group of financial investors, including some hedge funds, began filing appraisal cases. Appraisal arbitrage, as it became known, grew rapidly in popularity. Appraisal arbitrage'ssuccess soon attracted negative attention. In 2016, the Delaware legislature amended its appraisal statute to eliminate most small shareholders' appraisal rights and to permit companies to prepay merger consideration to appraisalpetitioners. In 2017, the Delaware Supreme Court issued two important decisions emphasizing that deal price was the primary measure offair valuefor lower courts to use in appraisalproceedings. Appraisal filings plummeted soon thereafter. In this Article, we seek to empirically explain the rise and fall of appraisal arbitrageusing data from 2000-2019. For the period 2015-2019, we find that the average deal gross return to appraisalarbitrage is 13.2 %-far less than the 98.2% average for the 2000-2014 period. Looking at the main components of these returns, we find that, on average, prejudgment interest accrualgenerated total returns of 18.1% for appraisalpetitioners from 2015-2019. However, the difference between the judicially determined fair price minus the deal price averages negative 5.3%. While both of these numbers are sharply lower than those in the pre-2015 era, the drop in judicial value improvement is especially * Arthur F. Burns Professor of Free and Competitive Enterprise, Columbia Business School; and Research Associate, Law and Economics, National Bureau of Economic Research. She can be reached at [email protected]. ** Assistant Professor of Finance, University of Florida. He can be reached at [email protected]. ** John S. Beasley II Professor of Law and Business, Vanderbilt Law School; and Professor of Management, Owen Graduate School of Management, Vanderbilt University. He can be reached at [email protected]. The authors would like to thank Professor Kevin Haeberle and the participants of the 22nd Annual Law and Business Conference for useful comments on an earlier draft of this Article. The authors are also grateful to Meha Sadasivam, Regan Vicknair, Xinze Yao, and Yulin Wu for their excellent research assistance. 2133 2134 BOSTON UNIVERSITY LAW REVIEW [Vol. 100:2133 large. We conclude that the principal reasons for the decline of appraisal arbitrage were the Delaware Supreme Court's 2017 opinions. 2020] THE RISE AND FALL OFAPPRAISAL ARBITRAGE 2135 CONTENTS INTRODUCTION ............................................................................................. 2136 I. AN OVERVIEW OF APPRAISAL ........................................................... 2139 A. What Is Appraisal?.................................................................... 2139 B. Delaware'sAppraisal Statute....................................................2140 II. APPRAISAL ARBITRAGE.....................................................................2142 III. AMENDMENTS TO THE DELAWARE APPRAISAL STATUTE ................. 2144 A. The De Minimis Exception ........................................................ 2145 B. The Interest-ReductionAmendment...........................................2145 IV. DFC GLOBAL, DELL, AND ARUBA: THE DELAWARE SUPREME COURT CUTS BACK SHARPLY ON APPRAISAL ARBITRAGE ............... 2147 A. DFC Global Corp. v. Muirfield Value Partners, L.P.................2148 B. Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd ................................................................................... 2151 C. Verition Partners Master Fund Ltd. v. Aruba Networks, In c .............................................................................................. 2 15 3 D . Sum m ary .................................................................................... 2 154 V. DATA SOURCES AND EMPIRICAL OVERVIEW OF THE DATA .............. 2154 A. Data Sources and Sample Construction....................................2154 B. EmpiricalOverview of the Data................................................ 2156 VI. DATA ANALYSIS: APPRAISAL CHARACTERISTICS, RETURNS, AND NEW TRENDS ............................................................................. 2163 A. Firm and Deal CharacteristicsAssociated with Appraisals ..... 2163 B. Determinantsof AppraisalLitigation and Trial: Comparison of PredictivePower .............................................. 2167 C. Petitioners'Returns from Appraisal Litigation.........................2171 CONCLUSIONS AND POLICY IMPLICATIONS .................................................. 2176 APPENDIX: VARIABLE DEFINITIONS ............................................................. 2177 2136 BOSTON UNIVERSITY LAW REVIEW [Vol. 100:2133 INTRODUCTION Appraisal is a legislatively created right for shareholders to seek a judicial determination of the fair value of their stock in a limited set of corporate transactions. For many decades, appraisal was a little-used and frequently 1 maligned corporate law remedy. Beginning at the turn of the twenty-first century, this all changed as a group of financial investors-especially some specialized hedge funds-began investing in appraisal-eligible merger and acquisition ("M&A") transactions with the intention of filing appraisal cases and 2 garnering high returns from litigation in this once-stagnant area of law. Appraisal arbitrage, as it became known, took on a life of its own and grew rapidly in popularity. 3 Many scholars supported this new form of litigation, arguing that it largely 4 targeted deals with a high likelihood of abuse of minority shareholders. Other academics opposed the expansion of the appraisal remedy, taking the position that appraisal itself was susceptible to abuse. 5 The debate grew in intensity as more and more hedge funds began to crowd into the field, so that even high- profile transactions were not immune to appraisal arbitrage. The Delaware bar and the Delaware legislature grew concerned about potential strike suits by small shareholders. A second source of concern was the arguably high level of prejudgment interest awarded in cases that went to trial. The Delaware State Bar Association proposed two significant cutbacks to the scope of the Delaware appraisal statute to address these concerns: one proposal effectively barred small appraisal cases from proceeding,6 while the other impacted the amount of prejudgment interest paid by companies in certain The classic article decrying