An increasingly popular hedge fund strategy, commonly referred to as “appraisal arbitrage,” recently received a significant boost from the Delaware Court of Chancery. Appraisal arbitrage refers to the practice of buying shares in a target corporation following announcement of a buyout transaction, and seeking value above the buyout price through the appraisal process. In In Re Appraisal of Ancestry.com, Inc. (January 5, 2015), the Court found that a beneficial owner had standing to seek appraisal in respect of an acquisition even though it had purchased its shares in the open market after the record date for the stockholder vote and was unable to show that its shares were not voted in favor of the transaction. In denying Ancestry’s motion for summary judgment, the Court reasoned that the record holder of the shares (here Cede & Co.) only needed to show that enough shares were not voted in favor of the acquisition to cover the number of shares for which it demanded appraisal. Once this hurdle is met, a beneficial owner of such shares (here Merion) does not need to show that its specific shares were among those not voted in favor of the acquisition in order to file the appraisal petition. Thus Merion had standing to pursue appraisal. As money continues to flow toward this strategy, it may result in more appraisal petitions and increased closing risk, as well as erosion of shareholder value in public M&A.
Marc D. Mantell handles corporate and securities law matters at Mintz, primarily for technology clients. He represents companies, investors, underwriters, and other parties in mergers and acquisitions, securities offerings, debt financings, and other transactions.