Chancery Rules on Appraisal Rights for Shares Acquired After the Record Date for Merger Votes

Last Tuesday, Chancellor William Chandler handed down a short but long-anticipated decision in the Transkaryotic (TKT) appraisal litigation.  TKT shareholders approved the deal by the requisite majority of the outstanding shares.  Cede & Co., holder of record and a DTCC intermediary, voted 12.8 million shares in favor of the merger and voted against or abstained with about 16.8 million shares. 

The opinion addresses the appraisal rights, under 8 Del. C. § 262, of shareholders who purchased some 8 million shares held by Cede & Co. after the record date for voting on the merger.  TKT sought summary judgment on the appraisal petition, arguing that the stockholders seeking the appraisal had the burden of proving that their shares were not among those voted by Cede in favor of the merger.  That sort of burden would have been impossible to satisfy, since market purchases after the record date can’t be traced to specific shares, and there is therefore no way to “tie” specific shares owned by those seeking the appraisal to shares that were voted for (or against) the merger. 

In an important ruling, Chancellor Chandler concludes that the traditional statutory reliance on record stockholder status in appraisal cases works in favor of the appraisal seekers: as long as the stockholder of record formally demands an appraisal in a timely fashion (i.e., before a vote on the merger), the law is indifferent as to whether a predecessor beneficial owner sought to vote the shares in favor of the merger.

The Chancellor acknowledges the policy concern expressed by TKT: namely, that this reading of the law would “pervert the goals of the appraisal statute by allowing it to be used as an investment tool for arbitrageurs as opposed to a statutory safety net for objecting stockholders.”  As to this objection, the Chancellor embraced a conservative view of the judicial role: he invited legislative attention to “the evil, if it is an evil.”

How “evil” or “good” this ruling proves to be may depend in significant part on the ultimate resolution of the valuation issue.  At this point, I’m not deeply troubled.  As Michael Wachter and I noted in The Short and Puzzling Life of the “Implicit Minority Discount” in Delaware Appraisal Law (at pages 44-45, forthcoming in the University of Pennsylvania Law Review), one would ordinarily expect the purchase price in an arm’s-length acquisition to exceed the “fair value” to be awarded in appraisal litigation–in which “fair value” must, according to settled judicial interpretation of 8 Del. C. § 262(h),  exclude synergistic merger gains. 

Accordingly, there should ordinarily be no incentive for arbitrageurs to use the appraisal remedy “as an investment tool,” since those who seek appraisal under Delaware law have to refrain from receiving even the merger price itself until the conclusion of the appraisal proceeding.  Of course, if the valuation standard were instead to award an amount that would have been paid in some hypothetical acquisition (on the theory that the actual sale process was somehow flawed), arbitrageurs might become much more patient with the deferred payment aspect of the appraisal remedy, and may increasingly resort to appraisal demands as a source of leverage in connection with corporate acquisitions.