There is language in the decision underscoring that the Delaware Chancery Court will look closely to the market in assessing fair value, barring exceptional circumstances (eg, a poorly run sale process). Many see In Re Appraisal of, Inc as a blow to the practice of appraisal arbitrage. The court allowed the petitioners to collect interest, limiting their potential losses. On DecemAncestry's stockholders approved the transaction, with 99% of the shares present and voting at the meeting voting in favour of the transaction.Īcknowledging that it found the approach taken by valuation experts on either side to be "less than fully persuasive", the court nevertheless determined that "fair value" was "best represented by the market price", noting that the discounted cash flow valuation came close to the market price and gave comfort that "no undetected factor skewed the sales process". Ancestry subsequently received written demands for appraisal on behalf of hedge fund stockholders collectively holding approximately 1.4 million shares.
The acquisition of Ancestry by Permira was announced on Octoat a price of $32 per share, which represented a 41% premium above the trading price of Ancestry's stock. In assessing fair value, the Delaware Chancery Court may also determine that the fair market value for shares of an acquired company is at or below the merger price. However, appraisal arbitrage is not without its risks.
For example, in 2012 Orchard Enterprise Inc was ordered to pay hedge funds that successfully exercised appraisal rights more than twice the per share merger price. The returns associated with appraisal arbitrage can be substantial, including because the statutory interest rate for appraisal awards (which begins to accrue as of the merger's effective date) is the Federal Reserve discount rate plus 5%. Under Section 262 of the Delaware Code, dissenting stockholders which have perfected appraisal rights have the right to a judicial determination of the fair value of their stock based on the value of the acquired firm as a going concern. In recent years, certain hedge funds have pursued an investment strategy known as 'appraisal arbitrage', pursuant to which they acquire stock of a public company after a merger is announced in the hope that the Delaware Chancery Court will determine that the fair value of such stock is actually higher than the merger price. In a JanuDelaware Chancery Court decision, In Re Appraisal of, Inc, (1) the court found that the price paid for the $1.6 billion buy-out of by private equity firm Permira Advisers LLC was fair.
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