When a company agrees to be acquired, sometimes shareholders dissent from the transaction, arguing the company failed to negotiate a fair sale price. To address this, most states provide a mechanism for dissenting shareholders to obtain a third-party appraisal of their shares. If the appraisal process results in a higher acquisition price, the dissenting shareholders receive that higher price for their shares. Buyers recognize this risk, and typically demand that the selling securityholders indemnify the buyer against the cost of the appraisal process (including the impact of the higher price).
In Delaware (the legal home of many acquired companies), Section 262 of the Delaware General Corporation Law provides for appraisal rights. It also includesan incentive for shareholders to exercise appraisal rights: once the appraisal process concludes, the court can grant the shareholders the appraised price plus interest from the time the merger closed at a rate equal to 5% over the Federal Reserve discount rate. In the current low interest rate environment, many investors consider receiving an almost risk-free 5% on funds a strong return. Thus, securityholders can take advantage of the appraisal process (that can take two or more years to resolve), with the worst case being a 5% annual return on the merger proceeds.
The Delaware State Bar Association has recognized this issue, and has proposed an amendment to Section 262. The amendment would allow the buyer to limit the accrual of interest by paying early the merger proceeds to the dissenting shareholders. Then, the dissenting shareholders would be entitled to interest only on the difference (if any) between the final appraised amount and the original merger proceeds amount. If adopted by the Delaware General Assembly, we will follow the data to see if it impacts the frequency of shareholders exercising their appraisal rights.
As a leading post-closing shareholder representative on private M&A deals, we have been involved in hundreds of M&A deals and related post-closing matters. Using our experience, we have built a reference tool for the M&A community to empower dealmakers with the data they need to understand “market,” negotiate better deals and follow emerging trends. You can explore further in Fortis Advisors’ Forsite™ M&A Deal Tool. For additional insights into the data, along with practice tips on M&A transactions, you can read further in our After Closing Series and Fortis Insights.