Section 262 Appraisal Amendments
The purpose of this paper is to summarize briefly the considerations leading
to the currently proposed amendments for Delaware’s appraisal statute, Section
262 of the Delaware General Corporation Law (“DGCL”).
Background
In February 2014, the Council of the Corporation Law Section of the
Delaware State Bar Association (the “Council”) appointed a subcommittee
comprised primarily of Council members to study the desirability of amendments
to Section 262. Creation of the subcommittee arose in part because of increasing
commentary about “appraisal arbitrage” and whether it is consistent with the
intended purpose of the appraisal statute.1 Appraisal arbitrage is generally
understood to be the acquisition of shares with attendant appraisal rights purchased
after the public announcement of a planned merger. Successful appraisal arbitrage
anticipates that the merger will be consummated, appraisal rights will be perfected
and the recovery (including interest) will provide a favorable return.
The subcommittee initially considered whether to modify Section 262 to
eliminate or limit appraisal arbitrage. Several considerations led the subcommittee
to recommend and Council to conclude that the statute should not limit appraisal
rights to shares held before the public announcement of a proposed transaction.
Council does not believe appraisal arbitrage upsets a proper balance between the

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 ability of corporations to engage in desirable value enhancing transactions and the
ability of dissenting stockholders to receive fair value for their holdings.
 Delaware law since at least 1989 explicitly has recognized the right of a
stockholder who has otherwise perfected his appraisal rights to pursue
appraisal of shares purchased after the terms of the merger were announced.2
 Recent case law has suggested that a market test of a transaction will serve
as a proxy for fair value in appraisal suits, so that arm’s-length deals with
adequate market checks do not create appraisal risks for buyers.
 Where transactions cannot be subject to a market check for structural
reasons (such as buy outs by controlling stockholders who are unwilling to
sell), fiduciary duties and litigation may not be sufficient to ensure that the
merger price reflects the fair value of the acquired shares.
 To the extent that the appraisal remedy is necessary to protect stockholders,
its effectiveness would be curtailed if the statute were amended to limit the
ability to transfer the right. The assignment and acquisition of financial
claims (in contrast to tort claims) generally has been accepted historically
and presently as lawful and consistent with public policy.3
 Studies of appraisal arbitrage do not suggest that it encourages frivolous
litigation. Unlike the case of representative litigation, which occurs in more
than 90% of the public mergers and consolidations, only 17% of the
appraisal eligible transactions during 2013 resulted in appraisal litigation in
Delaware.4
 Appraisal cases seem to be self-selecting, attacking primarily conflict
transactions or transactions involving questionable pricing. Such
transactions, which have a greater potential for unfairness and frequently
result in appraisal awards at a premium to the merger price, sometimes a
very significant premium.5
 Appraisal cases attacking the merger consideration in non-conflict
transactions are fewer in number and often result in appraisal results below
or near the merger consideration.6

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  To the extent that the buyer in a merger has concern about an increased
number of merger claimants and the overall cost of the transaction, the buyer
can negotiate an appraisal out condition (e.g. a right not to close the merger
if more than a specified percentage of shareholders dissent and demand
appraisal). The fact that such appraisal-out conditions remain fairly rare
suggests that the availability of appraisal arbitrage is not a significant factor
in the market.
The Legislative Proposals
The Council proposes two modifications to Section 262 to improve its
operation. The first modification limits pursuit of otherwise qualified appraisal
claims in public company transactions if the claim is de minimis. The second
modification addresses the concern that appraisal arbitrageurs may be incented to
pursue claims simply because of the amount of interest they would be able to
recover on the award. It gives corporations options to prevent interest arbitrage.
A.

The De Minimis Exception

The proposed legislation would amend Section 262(g) to impose limits on
the availability of a judicial determination and award of fair value where the
otherwise eligible appraisal shares have been traded on a national securities
exchange. If 99% of the stockholders accept the merger consideration, or the
amount in dispute is less than or approaches the cost of litigation, it is difficult to
justify the use of judicial and party resources to provide a judicial determination of
value. Thus, the amendment would permit a surviving corporation in a merger or
consolidation to obtain dismissal of an otherwise perfected appraisal claim unless

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 (i) the total number of shares entitled to appraisal exceeds 1% of the outstanding
number of shares that could have sought appraisal; or (2) the value of the merger
consideration for the total number of shares entitled to appraisal exceeds $1
million; or (iii) the merger was approved pursuant to Section 253 or Section 267.
Appraisal rights would be precluded unless the dispute with regard to valuation
meets a minimum threshold of significance measured by the number of dissenters
or the amount in dispute. Surmounting one of these hurdles minimizes risk that
appraisal will be used to achieve a settlement simply because of the nuisance value
of discovery, the cost of financial experts and other burdens of litigation. Section
253 and Section 267 short form mergers are not subject to the appraisal limitation
because appraisal may be the only remedy available.7 The de minimis carve-out
will apply only to shares traded on a national securities exchange. The difficulty of
valuing the merger consideration in a private company and the unlikely prospect
that the one percent threshold would not be met counseled against providing a de
minimis exception in cases not involving shares traded on a national securities
exchange.
B.

The Corporation’s Option to Pay and Limit the Accrual
of Interest

The proposed amendment to Section 262(h) would provide corporations the
option of limiting the accrual of interest on appraisal awards. Since 2007, Section
262(h) generally provides for an award of interest equal to Delaware’s legal rate of
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 interest – the Federal Reserve discount rate plus 5%.8 That amendment was
designed to simplify the appraisal proceeding and limit the amount of time
previously spent by the parties, the court and experts on determining a proper rate
of interest.9 Some commentators and practitioners became concerned that the
statutory interest rate, which for the last several years has provided an attractive
rate relative to money market and government yields, encouraged interest arbitrage
by appraisal claimants. Empirical studies cast doubt on this supposition and hedge
funds openly engaged in appraisal arbitrage have substantially greater investment
return targets than the legal rate.10 The Council, however, believes corporations
should have the option to cut off the accrual of interest by paying to the appraisal
claimants a sum of money of the corporation’s choosing. Thereafter, with respect
to the amount paid, interest would not accrue. Interest would only accrue if the
judicial award exceeded the amount paid, and then would accrue only on the
excess. The corporation exercising this option would need to pay all claimants
unless there is a good faith basis for contesting a stockholder’s entitlement to
appraisal. Payment pursuant to this option would not give rise to any inference
with respect to the fair value of the shares to be appraised. The option this
amendment would afford corporations would permit them to make a rational
choice about the relative cost of paying or retaining all or a portion of the merger
consideration during the pendency of the dispute.

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 Because respondent corporations would have this option, the incentive for
interest rate arbitrage will be dampened without compromising the interests of preexisting equity holders. The reason for that is that interest rate arbitrage investors
cannot depend on receiving the statutory rate as to most of the merger
consideration, because a respondent could immediately tender, for example, 75%
of the transaction price, thus reducing the petitioners’ ability to get the statutory
rate as to the bulk of the amount likely to be due at the end of the proceeding. As a
result, the amendment better ensures the appraisal actions will be motivated by a
genuine interest in proving that the transaction price was unfair.

Effective Date
The proposed legislation provides for the amendments to be effective with
respect to merger or consolidation transactions pursuant to agreements first entered
into on or after August 1, 2015. It would not affect pending litigation.

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 1

See, e.g., Fried Frank M&A Briefing (6/18/14), New Activist Weapon, The Rise of
Delaware Appraisal Arbitrage: A Survey of Cases and Some Practical Implications;
Kobi Kastiel, Why Delaware Appraisal Awards Exceed the Merger Price,
http.blogs.law.harvard.edu/corpgov/2014/09/23.
2

Salomon Brothers Inc. v. Interstate Bakeries Corporation, 576 A.2d 650 (Del. Ch.
1989).
3

6 Del. C. § 2702 (assignees of bonds, specialties and notes may enforce in their own
name); 10 Del. C. § 3902 (assignees of contracts may enforce in their own name);
Lauren D. Gojkovich, Leveraging Litigation: How Shareholders Can Use Litigation
Leverage to Double Down on Their Investment in High Stakes Securities Litigation; 16
STAN. L.J. Bus. & Fin., 100, 111 (2010).
4

Steven Epstein, Philip Richter, et al., Keeping Current: Delaware Appraisal: Practical
Considerations, BUSINESS LAW TODAY, 1 (October 2014); Myers, Minor and
Korsmo, Charles, Appraisal Arbitrage and the Future of Public Company M&A (April
14, 2014) forthcoming, 92 Washington University Law Review ____ at 1-5, 41-47
(2015) Brooklyn Law School Legal Studies Paper No. 388 (hereinafter “Korsmo &
Myers (2014)”).
5

Id.

6

Id.

7

Glassman v. Unocal Exploration Corp., 777 A. 2d 242 (Del. 2001)

8

6 Del. C. § 2301.

9

See e.g. Lebman v. National Union Electric Corp., 441 A.2d 824 (Del. Ch. 1980); Dole
Transcript (2015) at 24-26.
10

Korsmo & Myers (2014) at 2, 24-25.