The Appraisal Trade Is Back

Appraisal arbitrage, a strategy involving shareholders suing for fair value after a merger in Delaware, has become less attractive due to changes in interest rate calculations. Previously, shareholders objecting to a merger price could sue for a higher valuation and receive interest on the difference from the deal's closing date, set at the Federal Reserve’s discount rate plus 5%, compounded quarterly; however, the article implies these interest rates are no longer as lucrative.

Analysis

The provided text describes appraisal arbitrage, a legal recourse available to shareholders of Delaware-incorporated public companies involved in cash mergers. Shareholders who dissent from a merger price they deem too low can sue for a judicial determination of 'fair value.' A key feature that historically made this an attractive strategy is the statutory interest awarded on the final adjudicated share value, calculated from the merger's closing date until payment. This interest is set at the Federal Reserve’s discount rate plus 5%, compounded quarterly, regardless of whether the court awards a higher, lower, or the same value as the original merger offer. The article explicitly states, "The Appraisal Trade Is Back," indicating a renewed relevance or viability of this strategy, which previously provided a compelling financial incentive due to this interest mechanism.

Key Decisions for Investors

• Investors, particularly event-driven funds, should note the re-emergence of appraisal arbitrage as a potentially viable strategy in cash mergers involving Delaware-incorporated companies, especially when deal valuations are contentious.
• The statutory interest rate of the Federal Reserve's discount rate plus 5% on appraisal awards remains a significant financial consideration, potentially offering an attractive risk-adjusted return on capital tied up during litigation.
• Consider evaluating M&A targets for potential appraisal arbitrage opportunities if the offer price appears substantially below intrinsic fair value, factoring in the legal costs and timeline against the potential uplift from both valuation and accrued interest.