The High Cost of Fewer Appraisal Claims in 2017: Premia Down, Agency Costs Up

Abstract

This Essay considers the preliminary results of an ongoing effort to discourage appraisal litigation. In the year since the August 2016 reforms to the Delaware appraisal statute, Chancery has issued a slew of at-or-below merger price appraisal opinions in cases such as Clearwire and PetSmart, while simultaneously pinioning fiduciary litigation by reiterating the principles of Corwin. The result — as one would expect when costs are raised and benefits are reduced — has been that fewer deals are being challenged via appraisal: In 1H 2017, the number of deals challenged fell by 33%. Those who successfully advocated for curbs on the practice had argued that appraisal claims lowered deal premia by incenting buyers to withhold top dollar, thereby hurting non-appraising shareholders. On their view, curtailment of appraisal should have sent premia upwards. But year to date the average U.S. target premium of 22.4% is the lowest of any year in recent history. The average target premium in 2Q 2017 of 19.3% was the single-lowest of the fifty prior quarterly observations; thus far, 3Q 2017, at 19.6%, is tracking as the second-lowest. Amid the pronounced decline in merger premia, change-in-control payouts have expanded as a percentage of transaction value. When analyzed in concert with other measures indicative of agent rent-seeking — such as target premium to 52-week high over varying periods — the evidence points to a substantial transfer of value from target shareholders to selling CEOs, who have adapted to an environment rendered more permissive by the weakening of the shareholder litigation ‘check’ that had formerly restrained such behavior.