Vanderbilt Law Review

First Page



Appraisal rights are codified by section 262 of the Delaware General Corporation Law ("DGCL"), which grants dissenting target shareholders in a merger the right to seek judicially determined fair value for their shares.' Appraisal rights therefore aim to protect dissenting shareholders from majority expropriation. 2 However, a new class of shareholders has emerged, testing the bounds of this remedy. "Appraisal arbitrageurs" are hedge funds who seek to exploit the once seldom- used appraisal remedy by buying target company stock after the announcement of the merger solely to pursue appraisal. These appraisal arbitrageurs have fueled the ongoing resurgence of appraisal litigation, sparking debate among corporate law practitioners and academics, many of whom condemn the investment strategy. Powerful opponents argue that appraisal arbitrage creates significant transaction costs for merger parties by extracting rents from target shareholders and creating deal uncertainty. Moreover, appraisal arbitrage has sparked a close look at Delaware courts' methodology in appraisal proceedings, exposing inconsistencies in valuing companies and revealing the judiciary's inappropriate legislative role. Accordingly, the backlash against appraisal arbitrage has not only uncovered a need This Note proposes reforming Delaware's appraisal statute to curb appraisal arbitrage and ensure certainty in appraisal proceedings, upholding the purpose of the appraisal remedy and addressing practical concerns. Part I reviews Delaware's appraisal statute and its related practical considerations, evaluates the economic incentives surrounding appraisal arbitrage, and chronicles the anti-arbitrage call for legislative reform. Part II analyzes specific aspects of the appraisal statute and its attendant judicial application in context with intended policy goals and underlying economic principles. It suggests the market out exception is unnecessary for disinterested mergers and critiques how the appraisal statute and its judicial interpretation promote appraisal arbitrage and undermine the purpose of the remedy. It also explores Delaware courts' valuation methods, inconsistent appraisal doctrine, and improper political motives and legislative role. Part III advocates for legislative reform beyond recent amendments to section 262, including constricting aspects of appraisal rights to eliminate the perverse economic incentives that attract arbitrageurs and to effect the purpose of the appraisal remedy. While the de minimis and interest reduction amendments are a welcome start, Delaware should also (1) confine the market-out exception's cash carve-out to interested transactions, (2) limit appraisal rights to shareholders as of the record date, and (3) delegate valuation in appraisal proceedings to a panel of, independent finance professionals.