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52 Wake Forest L. Rev. 89 (2017)
The Uncertain Case for Appraisal Arbitrage

handle is hein.journals/wflr52 and id is 97 raw text is: THE UNCERTAIN CASE FOR APPRAISAL ARBITRAGE Jay B. Kesten* INTRODUCTION A new form of merger arbitrage has fundamentally changed the high-stakes arena of takeover litigation. Traditional arbitrageurs purchase stock in a target company immediately after the announcement of an acquisition to capture the premium associated with the risk of deal failure.1 By acquiring shares (often a substantial number) and then voting them in favor of the deal, arbitrageurs aim to improve the likelihood of a successful closing, thus increasing their expected returns.2 Recently, a new strategy has emerged. Arbitrageurs purchase large blocks of shares with a much different plan: they do not vote in favor of the merger and instead challenge the adequacy of the deal price through appraisal litigation. The appraisal remedy provides shareholders who dissent from certain fundamental transactions, such as mergers, with the statutory right to petition the court for a judicial determination of the fair value of their shares.3 Long dismissed as a sleepy corporate backwater-rarely employed and economically insignificant- appraisal has been profoundly transformed by this new arbitrage strategy.4 Hedge funds specializing in appraisal arbitrage have raised billions of dollars in recent years.5 And, unsurprisingly, * Assistant Professor, Florida State University College of Law. The author thanks John Coffee, DRJ, Ben Edwards, Sean Griffith, Jeff Kahn, Charles Korsmo, Murat Mungan, Minor Myers, Robert Rhee, Mark Seidenfeld, Manuel Utset, as well as workshop participants at the University of Florida Law School, the Florida State University College of Law, and the National Business Law Scholars Conference, for their helpful comments, suggestions, and discussions. The author also thanks Tawanna Franklin for her excellent research assistance. 1. Wei Jiang et al., Influencing Control: Jawboning in Risk Arbitrage 2-3 (Columbia Bus. Sch., Working Paper No. 15-41, 2016), http://papers.ssrn.com /sol3/papers.cfm?abstract id=2587925. Target company stock prices generally rise in the aftermath of a deal announcement but remain below the final purchase price due to the possibility that the deal may fail. Id. at 3. 2. Id. (The passive arbitrageur then votes his shares in favor of the merger and hopes to profit from the full price convergence at deal consummation.). 3. Charles R. Korsmo & Minor Myers, Appraisal Arbitrage and the Future of Public Company M&A, 92 WASH. U. L. REV. 1551, 1558 (2015). 4. Id. at 1553 (arguing that appraisal arbitrage has utterly transformed appraisal). 5. Trevor S. Norwitz, Delaware Legislature Should Act to Curb Appraisal Arbitrage Abuses, CLS BLUE SKY BLOG (Feb. 10, 2015), 89

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