Appraisal Rights

Appraisal rights exist in most US states under their respective corporate statutes, with Delaware's Section 262 being the most litigated and influential. They represent the legislature's response to the coercive nature of a merger: even if a majority of shareholders vote in favor of a deal, dissenters who believe the price is inadequate can opt out of the merger consideration and have a court determine what their shares are actually worth.

To exercise appraisal rights in Delaware, a shareholder must follow precise procedural requirements. The shareholder must not vote in favor of the merger, must deliver a written demand for appraisal to the company before the shareholder vote, and must continuously hold the shares through the effective time of the merger. Failure to meet any of these conditions results in the forfeiture of appraisal rights. Companies are required to notify shareholders of their appraisal rights in the merger proxy statement.

Once appraisal is demanded, the Delaware Court of Chancery conducts a plenary proceeding to determine fair value. Delaware law defines fair value as the going-concern value of the enterprise immediately before the merger, excluding any value attributable to the merger itself. This means synergy value that will only exist because of the combination — often a significant component of the merger premium — is generally excluded from the fair value determination. Courts have discretion in methodology and have used discounted cash flow analysis, comparable company analysis, and deal price itself as indicators of fair value in different cases.

Appraisal arbitrage became a cottage industry in the 2000s and 2010s, with hedge funds purchasing shares after deal announcement specifically to exercise appraisal rights, betting that the court's fair value determination would exceed the deal price. Delaware has responded to concerns about appraisal arbitrage by amending Section 262 to allow companies to pay shareholders a portion of the merger consideration as an advance, reducing the financial incentive for purely speculative appraisal claims, and by requiring a minimum threshold ownership for appraisal petitions.

Appraisal rights serve an important function in protecting minority shareholders from squeeze-out mergers or transactions in which the merger price may reflect the leverage of a controlling shareholder rather than true enterprise value. They represent one of the primary judicial checks on controlling shareholder behavior in US M&A.