The Long Rise and Quick Fall of Appraisal Arbitrage

Appraisal is a legislatively created right for shareholders to seek a judicial determination of the fair value of their stock in certain transactions. For many decades, appraisal was a little-used and frequently maligned corporate law remedy. Beginning at the turn of the twenty-first century, this all changed when a group of financial investors, including some hedge funds, began filing appraisal cases. Appraisal arbitrage, as it became known, grew rapidly in popularity. Appraisal arbitrage\u27s success soon attracted negative attention. In 2016, the Delaware legislature amended its appraisal statute to eliminate most small shareholders\u27 appraisal rights and to permit companies to prepay merger consideration to appraisal petitioners. In 2017, the Delaware Supreme Court issued two important decisions emphasizing that deal price was the primary measure of fair value for lower courts to use in appraisal proceedings. Appraisal filings plummeted soon thereafter. In this Article, we seek to empirically explain the rise and fall of appraisal arbitrage using data from 2000-2019. For the period 2015-2019, we find that the average deal gross return to appraisal arbitrage is 13.2 %-far less than the 98.2% average for the 2000-2014 period. Looking at the main components of these returns, we find that, on average, prejudgment interest accrual generated total returns of 18.1% for appraisal petitioners from 2015-2019. However, the difference between the judicially determined fair price minus the deal price averages negative 5.3%. While both of these numbers are sharply lower than those in the pre-2015 era, the drop in judicial value improvement is especially large. We conclude that the principal reasons for the decline of appraisal arbitrage were the Delaware Supreme Court\u27s 2017 opinions