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Cross-Border Mergers pp 65–80Cite as

Appraisal Rights in the US and the EU

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Part of the book series: Studies in European Economic Law and Regulation ((SEELR,volume 17))

Abstract

Appraisal rights, a protection mechanism for minority shareholders, have recently captured the attention of academics and policymakers. The rise of a new breed of hedge funds which specialize in so-called appraisal arbitrage has resulted in a spectacular increase in appraisal petitions in connection with M&A transactions in the US and has led to calls for a tighter regulation of the appraisal remedy. Despite the growing popularity of appraisal rights in the US, this protection mechanism remains underutilized by shareholders in the EU. After discussing the general framework for merger transactions in the US and the EU, the present chapter will seek to offer an examination of appraisal rights in the US and the EU. Furthermore, it will discuss how shareholders, and in particular hedge funds, exploit the appraisal remedy in order to reap profits and assess the dangers posed by this practice. Finally, the chapter will seek to decipher the factors that have led to the growing use of the appraisal remedy in the US and its underutilization in EU.

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Notes

  1. 1.

    See Thomson (1995), pp. 3–5, 9–42; Wertheimer (1998).

  2. 2.

    Manning (1962).

  3. 3.

    See for instance Fischel (1983).

  4. 4.

    Eisenberg (1969), p. 85. See also Fried and Ganor (2006), p. 1005.

  5. 5.

    Hoffmann (2016).

  6. 6.

    Hoffmann (2013).

  7. 7.

    See for instance Bech-Bruun, Lexidale (2013), pp. 68–69.

  8. 8.

    Delaware is the leading state of incorporation for U.S. public companies with more than half of all US publicly-traded companies incorporated in Delaware. See Roe (2009), p. 130. Delaware’s competitive advantages include a highly specialized judiciary in resolving corporate law disputes, responsiveness to the needs of its corporations and network benefits stemming from its position as the leading incorporation jurisdiction. See generally Kamar (1998), pp. 1913–1919.

  9. 9.

    See Kraakman and Armour (2017), p. 183.

  10. 10.

    Pursuant to section 141(a) of the DGCL the power to manage the business affair of the corporation is vested with the board of directors. Del. Code Ann. tit. 8, § 141.

  11. 11.

    For a critique of the board-centric model of US corporate law and the power granted to the board of directors to initiative mergers and other fundamental changes see Bebchuk (2005).

  12. 12.

    Del. Code Ann. tit. 8, § 251(c).

  13. 13.

    ibid.

  14. 14.

    For instance, mergers may be driven by managers’ empire building motive. See e.g. Marris (1963). As Jensen notes managing a larger company will typically result in an increase in managers’ compensation. Furthermore, managers may be tempted to execute a merger by the increased prestige associated with running a larger company. See Jensen (1989).

  15. 15.

    Del. Code Ann. tit. 8, § 251(d).

  16. 16.

    See generally Morrissey (2013).

  17. 17.

    Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies [2011] OJ L 110/1.

  18. 18.

    Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies [2005] OJ L 310/1 (Cross-Border Mergers Directive).

  19. 19.

    Grundmann (2012), p. 668.

  20. 20.

    See Papadopoulos (2008), p. i.

  21. 21.

    Cross-Border Mergers Directive, art. 5.

  22. 22.

    ibid., art. 7.

  23. 23.

    See Siegel (2011), pp. 233–234.

  24. 24.

    Note (1976), p. 1030.

  25. 25.

    Del. Code Ann. tit. 8, § 262(h).

  26. 26.

    ibid.

  27. 27.

    Papadima (2015), p. 190.

  28. 28.

    Wyckaert and Geens (2008), p. 43.

  29. 29.

    ibid, 47–48.

  30. 30.

    European Commission (2015).

  31. 31.

    Jiang et al. (2016), pp. 704–705.

  32. 32.

    ibid.

  33. 33.

    Korsmo and Myers (2015), pp. 1570–1571.

  34. 34.

    Mei (2014–2015), p. 83.

  35. 35.

    Jiang et al. (2016), p. 704.

  36. 36.

    ibid, 705.

  37. 37.

    ibid.

  38. 38.

    ibid, 706.

  39. 39.

    See generally Subramanian (2017).

  40. 40.

    Thomson and Webb (2013).

  41. 41.

    Jack (2013).

  42. 42.

    Massoudi (2017).

  43. 43.

    Norwitz (2015).

  44. 44.

    ibid.

  45. 45.

    ibid.

  46. 46.

    Jiang et al. (2016).

  47. 47.

    Kalodimos and Lundberg (2017).

  48. 48.

    Boone et al. (2017).

  49. 49.

    In re Appraisal of Transkaryotic Therapies, Inc., No. Civ.A. 1554-CC, 2007 WL 1378345, at ∗1 (Del. Ch. May 2, 2007). For an in-depth analysis of the case see Geis (2011).

  50. 50.

    For an excellent description of the US system of share ownership see Kahan and Rock (2008), pp. 1236–1247.

  51. 51.

    Jetley and Ji (2017).

  52. 52.

    ibid.

  53. 53.

    Del. Code Ann. tit. 8, § 262(h).

  54. 54.

    Jiang et al. (2016), p. 720.

  55. 55.

    Jetley and Ji find that Delaware’s statutory interest rate is higher than the risk-free rate and the yield on U.S. corporate bonds both with a maturity of 3 years. The authors conclude that ‘the statutory interest rate has compensated appraisal petitioners for more than the time value of money and for more than a bond-like claim’.

  56. 56.

    Papadima et al. (2016), p. 1076.

  57. 57.

    Bomba et al. (2014), p. 3.

  58. 58.

    For an introduction into discounted cash flow analysis see Higgins (2012), pp. 247–295.

  59. 59.

    Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214 (Del. 2010).

  60. 60.

    Weinstein and Magnino (2017). The recent decision of the Delaware Supreme Court in Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd, which overturned the Delaware Chancery Court’s 2016 decision, strongly reinforced the view that the merger price serves as the best indication of appraisal value. Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd 2017 WL 6375829 (Del. Dec. 14, 2017).

  61. 61.

    For a criticism of courts’ reliance on merger price see Choi and Talley (2017). For instance, the scholars argue that reliance on merger price effectively neutralizes the appraisal remedy and dissuades shareholders from filing appraisal petitions, since appraisal can never result in a premium over the merger price.

  62. 62.

    Foucault et al. (2013), p. 8. Liquidity is typically measured by the bid-ask spread. The higher the bid-ask spread the less liquid the market. In most markets the bid-ask spread is set by dealer or market makers. The spread is the difference between the minimum price at which the dealer is willing to sell a security and the maximum price at which the dealer is willing to buy a security. See Schaeken Willemaers (2011). Numerous studies have found that stock market liquidity is crucial for economic growth. See Levine and Zervos (1998) and Atie and Jovanovic (1993).

  63. 63.

    Jiang et al. (2016), pp. 712–713.

  64. 64.

    Stowell (2018), p. 249.

  65. 65.

    The EU hedge fund sector will also be negatively impacted by the UK’s exit from the EU. The UK is the leading hedge fund center in Europe with London hosting some of world’s best-known hedge funds such as The Children’s Investment Funds and Brevan Howard. For an aggregated picture of hedge fund activity in the UK see Financial Conduct Authority (2015), p. 4.

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Acknowledgements

I would like to thank participants at the “Cross-Border Mergers Directive: EU perspectives and national experiences” conference, in particular Arkadiusz Radwan and Thomas Papadopoulos, for useful comments.

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  1. Trinity College Dublin, School of Law, Dublin, Ireland

    Alexandros Seretakis

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  1. Alexandros Seretakis
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Correspondence to Alexandros Seretakis .

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  1. Department of Law, University of Cyprus, Nicosia, Cyprus

    Thomas Papadopoulos

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Seretakis, A. (2019). Appraisal Rights in the US and the EU. In: Papadopoulos, T. (eds) Cross-Border Mergers. Studies in European Economic Law and Regulation, vol 17. Springer, Cham. https://doi.org/10.1007/978-3-030-22753-1_4

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