The practice of a hedge fund buying shares in a Delaware corporation upon the announcement of a cash-out merger to then exercise appraisal rights, sometimes referred to as “appraisal arbitrage,” has generated controversy. Some argue that this practice is inconsistent with the appraisal remedy that should be available only to allow long-term shareholders who disagree with the cash-out price to have the Delaware Court of Chancery determine the fair value of their shares. Others argue, and the Delaware courts have agreed, that the appraisal statute permits the appraisal remedy to those who hold the shares on the merger date, even if, like the petitioners in this case, they (1) became owners only after the announcement of a merger solely to exercise appraisal rights and (2) could not demonstrate that the shares they purchased had not been voted in favor of the merger.
Regardless of the merits of this debate, if the Delaware courts continue to recognize that a merger price that results from a full and fair sale process may be the best evidence of fair value, it is likely that the incentives for hedge funds to engage in appraisal arbitrage will diminish. The recent Court of Chancery decision in Merion Capital LP v. BMC Software, C.A. No. 8900-VCG (Del. Ch., October 21, 2015), is the latest Delaware decision to so hold, which likely will cause appraisal petitioners in this circumstance carefully to evaluate whether to bring appraisal actions in the first place as the prospects of a huge return are diminished.
