The use of the appraisal remedy by dissenting shareholders in Delaware has surged in recent years, fueled by appraisal arbitrage. Proposed reforms to limit or eliminate appraisal arbitrage in Delaware should be rejected, according to a new draft article to be published in the Delaware Journal of Corporate Law.

Potent remedy: The authors, Charles Korsmo, associate professor of law at Case Western Reserve University School of Law,and Minor Myers, professor of law at Brooklyn Law School, say the increase in appraisal activity benefits public shareholders in circumstances where they are most vulnerable. “We have shown that these appraisal specialists focus their resources on a small number of transactions and that those transactions exhibit proxies for legal merit: abnormally low merger premia and insider involvement.”

While they say the reforms suggested by both respondent companies and deal advisors should not go through, they suggest other reforms to improve the effectiveness of appraisal, such as requiring disclosure of more financial information in M&A transactions subject to appraisal.

New amendments: Subsequent to the paper being released, the Corporate Council of the Corporation Law Section of the Delaware State Bar Associationhas once again proposed some changes to Delaware’s appraisal statute. The proposed changes are intended to: (a) set a floor for the number and value of shares asserting appraisal; and (b) permit M&A targets to prepay some or all of the merger consideration to dissenters to avoid the accrual of interest on such prepaid amounts. There are no specific proposals to eliminate or limit appraisal arbitrage.

Note: We should point out that the paper’s authors are principals of Stermax Partners, which provides compensated advice on stockholder appraisal and manages appraisal-related investments, and they have economic interests in the outcome of appraisal proceedings.