A fairly new litigation development is the subject of two Delaware Court of Chancery decisions issued on the same day. Both In re Appraisal of Ancestry.com, Consol. C.A. No. 8173-VCG (Jan. 5, 2015), and Merion Capital v. BMC Software, C.A. No. 8900-VCG (Jan. 5, 2015), sustained the right of appraisal arbitrageurs to seek appraisal of the stockholdings following a cash-out merger. Had the court ruled differently, it might have severely limited such actions in Delaware.
Appraisal arbitrage has grown over the last several years to the point where the once-rare appraisal action has now become almost common. Somewhat oversimplified, appraisal arbitrage involves buying the stock of a company that has announced it is going to complete a merger that will entitle its stockholders to have the “fair value” of its stock determined by the Court of Chancery. Typically (but not always) that involves a going-private merger where stockholders are required to accept the cash price offered for their stock and cannot continue as stockholders of the merged entity. If those stockholders are dissatisfied with the price, they may demand appraisal of its fair value. The plaintiffs in appraisal arbitrage cases buy the company’s stock after the merger is announced, with the expectation that they will win a higher price later by going through the appraisal process.
