AN APPRAISAL OF APPRAISAL RIGHTS IN DELAWARE

[PDF]

Jennifer McLellan

Shareholders dissatisfied with the corporation’s decision to merge or consolidate may seek redress by asking a court to assign a fair value to their shares. The right to an appraisal is longstanding and “entirely a creature of statute.”[2] Exercising the right, however, entails certain risks. Under Delaware law, the process is uncertain and can result in a value less than what was offered in the merger.[3] In addition, the process may take years to complete, with shareholders remaining unpaid until completion of the judicial valuation process.

Shareholders, therefore, must make a difficult calculation in determining whether to exercise appraisal rights. Nonetheless, reports have suggested that hedge funds and other professional investors have targeted appraisal rights as a method of enhancing their return.[4] These investors at least sometimes make tactical purchases of stock in target companies in order to obtain these rights.[5] Some even wait until after the record date but before the shareholder vote to buy the shares subject to appraisal rights.[6]

Shareholders exercising appraisal rights, including speculative investors, presumably do so because they believe that the process will result in a more favorable valuation.[7] Empirically, they appear to be correct. An examination of reported appraisal cases over the last five years indicates that fair value generally exceeds the merger price, sometimes by a considerable amount.[8] Even where shareholders receive only a modest improvement over the merger price, they benefit through a highly favorable interest rate mandated by statute.[9]

Part I of this paper provides an overview of appraisal rights. It includes a discussion of appraisal-triggering events, the applicable process, the consequences of exercising appraisal rights, and the methodologies developed by the courts to value the shares. Part II.A discusses the actual results of judicial valuations of shares in cases resolved over the last five years, and examines the rationale the court supplies in making this determination. Finally, Part II.B proposes that the subjective nature of the court’s determination of fair value of the dissenting shareholders’ shares actually benefits shareholders in Delaware.

I.          Overview of Appraisal Rights

Appraisal rights are a statutory remedy available to minority shareholders of a corporation who object to the price paid for their shares in a merger or consolidation.[10] The remedy enables dissenting shareholders to require the acquirer to repurchase their stock at a price equivalent to “the fair or intrinsic value of the corporation's stock immediately before the merger.”[11] The statute assigns to the courts the final authority to determine “fair value.”[12] 

These rights arose out of the common law requirement that prohibited a corporation from making a “fundamental organic change” without unanimous shareholder approval.[13] An inflexible approach, states eventually abrogated from this authority and provided appraisal rights as an alternative.[14] First appearing in the 1920s,[15] appraisal statutes were only put to common use in the 1960s.[16]

The process of exercising appraisal rights generally involves three distinct steps: a triggering event;[17] notice and exercise;[18] and judicial valuation of the shares.[19] Statutes differ in a number of fundamental ways, most commonly with respect to the triggering events and the timing of the payment to dissenting shareholders.[20]

A. Triggering Events in Delaware

Under Delaware law,[21] appraisal rights are automatically triggered by some[22] but not all mergers.[23] The market-out exception eliminates appraisal rights in mergers with companies that are widely traded.[24] That exception, in turn, does not apply where the consideration is paid in cash.[25] Delaware also allows for private ordering with respect to appraisal rights. A corporation may, through its certificate of incorporation, provide for appraisal rights “for the shares of any class or series of its stock.”[26] 

B. The Appraisal Process in Delaware

Shareholders seeking to assert appraisal rights must conform to a number of procedural requirements.[27] Specifically, they must provide the corporation with pre-merger notice, hold the shares continuously through the effective date of the transaction, and not vote in favor of the proposed merger or consolidation.[28] Failure to take any of these steps results in waiver of the right to an appraisal.

i.   The Process for Seeking an Appraisal

The initial obligation with respect to appraisal rights falls on the corporation.[29] The corporation must provide notice of appraisal rights at least twenty days before the shareholder meeting seeking approval of the transaction.[30] Notice must include a copy of the statute and provide a detailed explanation of the process for perfecting appraisal rights.[31] If the corporation does not fulfill these requirements, the court may nonetheless permit shareholders to seek a quasi-appraisal remedy.[32]

Although not required by statute, directors have, as a matter of fiduciary duty, an obligation to disclose to shareholders “the available material facts that would enable them to make an informed decision, pre-merger, whether to accept the merger consideration or demand appraisal.”[33] Material facts are those in which there is a “substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”[34] For example, companies may have an obligation to provide financial disclosure in the pre-merger notice.[35]

Prior to the vote on the consolidation or merger, a dissenting shareholder must submit a written demand,[36] allowing the corporation to assess the “appraisal risk” before proceeding with the transaction.[37] The demand must “reasonably inform the corporation” of the shareholder’s identity and intent to seek an appraisal.[38] Shareholders are entitled to notification of approval of the transaction[39] and can withdraw their demand anytime within sixty days of the effective date.[40] Shareholders may also request a written statement setting out the number of shares subject to appraisal.[41]

ii.  Commencement of Appraisal Proceeding

The corporation or dissenting shareholder may file a petition with the Court of Chancery requesting a determination of fair value of the shares within 120 days of the effective date of the transaction.[42] The corporation has twenty days to submit a consolidated list of the names of the shareholders demanding payment for their shares.[43] The Chancery Court has the authority to determine the shareholders entitled to exercise appraisal rights.[44]   

In determining fair value, the court takes into account “all relevant factors.” Relevant factors are those “known or ascertainable as of the merger date that illuminates the future prospects of the company.”[45] They include “assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock.”[46] The court cannot, however, take into consideration any value resulting from the completion or expectation of the merger or consolidation.[47]

At trial, both parties must establish their proposed valuation by a preponderance of the evidence.[48] The court can accept either valuation model, create its own, or use independent judgment to determine fair value.[49] Payment to shareholders occurs only after judicial determination of fair value, a period that can take years.[50] Shareholders, however, receive interest calculated from the effective date of the merger through the day of payment.[51] The statute imposes an interest rate equal to 5% over the Federal Reserve discount rate.[52]

C. Valuation Methodologies

Fair value is “the value of the Company to the stockholder as a going concern, rather than its value to a third party as an acquisition.”[53] The courts seek only to determine the value of “what has been taken from the shareholder.”[54] The calculation looks to the value at “the point just before” the transaction[55] and thus excludes the effect of the merger or consolidation.[56] The approach also excludes discounts that arise from the sale of a minority position.[57]

i.   Methodologies

Fair value depends upon the selected valuation method (or methods).[58] Courts consider “all generally accepted techniques of valuation used in the financial community.”[59] Three methods are most common: discounted cash flow analysis (DCF); comparable companies analysis; and the comparable transactions analysis.[60] 

The comparable companies and comparable transactions analyses are alike in that they both look to similarly situated enterprises.[61] The former analysis compares the corporation to publicly traded companies using “price multiples of each corporation’s stock against selected benchmarks.”[62] The latter analysis “requires finding similar transactions, quantifying those transactions through financial metrics, and applying those metrics to the company at issue in order to arrive at a value.”[63] Both methods raise concerns over reliability. Not enough data always exists to make adequate comparisons. Moreover, different stages of growth may make comparisons problematic.[64]

The DCF method is “probably the most prominent and frequently used” method of appraisal.[65] The model presumes that “the value of a company is equal to the present value of its projected future cash flows.”[66] The method looks to cash flow projections over a specified period of time, typically five years, plus a terminal value, multiplied by a discount rate.[67] The terminal value entails a calculation of the present value of all of the company’s future cash flows commencing after the specific projection period.[68]

The applicable discount rate seeks to establish the present value of projected cash flows and terminal value.[69] This step “has a profound effect on the share price in an appraisal action.”[70] The discount rate is usually industry-specific and derived from the corporation’s weighted average cost of capital.[71]

After computing the present value, the courts will add any non-operating assets.[72] Then, “the total of these figures is divided by the number of shares outstanding, and the resulting amount is the fair value per share of the company.”[73] Since the DCF method seeks to denote the present value of the company’s cash flow, the result “fully reflects the value of the company as a going concern”[74] As a result, adjustments to reflect a minority discount or the added value of the merger are unnecessary.

ii.  Subjectivity and Uncertainty

Despite primary reliance on a single method of valuation, the “problems endemic to an appraisal proceeding . . . cannot be eliminated by the choice of [a particular] methodology.”[75] Such problems stem from the fact that the appraisal value represents a mere estimation of the “fair value” of a company, which is “dependent on the assumptions underlying the calculations employed.”[76]

The DCF analysis entails significant uncertainty. For example, to determine the prospective cash flows of an enterprise, courts look to “historical data, operating trends, and other relevant factors, but it is still nothing more than a prediction of future events.”[77] Likewise, computing the applicable discount entails underlying assumptions that can lead to uncertainty.[78] Calculation of terminal value has also been described as “exercises in guesswork and subjectivity.”[79] 

The inherent lack of objectivity has the practical result of transforming appraisal proceedings into a ballet of experts.[80] These experts, even while relying on the same methodology can reach starkly contrasting conclusions. For example, in Neal v. Alabama By-Products Corp.,[81] both parties’ experts used models based upon net assets and discounted future returns, yet obtained vastly differing results.[82] The “widely divergent” views on assets and liability forced the court “to pick and choose among the competing contentions, in search of a reasonable, and fair, value.”[83]

II.           Empirical Analysis of Appraisal Actions Since 2010

Shareholders invoking appraisal rights, therefore, face a number of risks. A dissenting shareholder “loses the traditional benefits of stock ownership,” such as the right to receive payment of dividends and other distributions on the shares.[84] The change in status essentially places the shareholder’s investment “in limbo” until the resolution of the appraisal action.[85] Moreover, Delaware defers any payment until the determination of fair value. As a result, the dissenting shareholders become subject to the company’s credit risk.[86] Mostly, however, shareholders face uncertainty with regard to the outcome. Because courts do not take the merger price into account, fair value can be less than the amount paid to other shareholders.[87]

Finally, shareholders generally must absorb the expenses associated with the appraisal process,[88] although not court costs.[89]

Shareholders do uniquely benefit from one aspect of the statutory framework. Although not paid until after the determination of “fair value,” shareholders receive a statutory interest rate calculated from the date of closing until the award is actually paid.[90] Statutory interest “serves to avoid an undeserved windfall to the respondent in an appraisal action, who would otherwise have had free use of money rightfully belonging to the petitioners. . . . . the respondent derived a benefit from having the use of the petitioners’ funds at no cost.”[91]

The court awards shareholders statutory interest on the appraisal award at a rate equal to the Federal discount rate, plus 5%.[92] Absent good cause to find otherwise, the interest applies regardless of the court’s determination with respect to fair value.[93] As a result, some investors will profit even if the court awards an amount that is equal to, or only slightly above, the merger price. For example, in Merion Capital, L.P. v. 3M Cogent, Inc.,[94] the court appraised the shares at $0.37 higher than what was received in the merger, yet the statutory interest rate was over seven times greater than the federal discount rate.[95] Declining to adhere to the respondent’s objections to the rate, the Court of Chancery noted, “[t]here are risks to both sides in an appraisal proceeding, however, and the applicable interest rate is only one of them.”[96] In addition, because of the sizable interest rate, “the mere threat of the mounting interest cost can coerce companies into considering unfavorable settlements with stockholders bent on pursuing an appraisal action.”[97]

A. Empirical Evidence

Until recently, “the remedy [of appraisal rights] had been infrequently invoked, at least as measured by reported legal decisions.”[98] Between 1972 and 1981, for example, there were only about 20 reported state court decisions.[99] That, however, has changed, with appraisal actions becoming more common.[100]

Given the subjectivity involved in valuing shares, the benefits to shareholders of asserting appraisal rights remain difficult to predict. The following section, however, seeks to reduce some of the uncertainty. The section analyzes the twelve reported appraisal actions in Delaware that occurred from 2010 through the present and compares the price obtained in the merger to the fair value determined by the court. Over this period, the Court of Chancery has generally appraised the value of the dissenting stockholder’s shares at a value significantly higher than what was received as consideration for the merger or consolidation.[101] As shown in the appendix, the court set the fair value anywhere from 3% to as much as 149% above the merger price. Moreover, the downside risk seems limited. In four of the cases, the court found that the price paid in the offering was fair.[102]

Two cases set the value below the merger consideration.[103] The unique circumstances of these cases, however, should be taken into account. In In re Trados Incorporated Shareholder Litigation,[104] the company actually valued the common stock at zero and gave a monetary value only to its preferred stock.[105] The $0.10 per share value was only found within some Board meeting minutes, and the court agreed with the company that the shares had no actual value.[106]

Additionally, shareholders considering bringing an appraisal action should not be overly concerned with the court’s decreased fair value price in Gearreald v. Just Care, Inc.[107] In Gearreald, the court determined the fair value of the company was approximately $5.75 million less than what was obtained as cash consideration in the merger.[108] This “decreased” figure is deceiving, however, because it fails to show that $6 million of the $40 million acquisition price was “held in escrow to pay claims against the Company arising during the two-year period following the close of the merger, including appraisal claims and costs.”[109] If the amount held in escrow is taken into account in the company’s initial fair value determination, then it becomes clear that the court did not actually find a decreased value through the appraisal proceeding.[110]

B. Shareholder-Friendly Valuations

In the past five years, shareholders seem more likely to receive a favorable valuation from the Court of Chancery. This occurs most often when the court removes subjective factors from the fair market assessment. For example, in In re Appraisal of the Orchard Enterprises, Inc., one of the court’s main concerns was determining the discount rate. The court noted, “[r]ather than . . . use methods that involve great subjectivity and lack firm grounding in corporate finance theory, . . . I choose to determine the discount rate using only the CAPM method.”[111] In doing so the court rejected both parties’ discount rate valuations, which relied on a number of methods, and opted for a more simplified approach.[112]

This indicates that shareholders may have an easier time predicting whether benefits will result from appraisal actions, to the extent that the methodology becomes more standardized. Should courts coalesce in adhering to valuation methods with less underlying assumptions imbedded within them, shareholders will face less uncertainty in seeking an appraisal remedy.

Like Orchard Enterprises, the court in Laidler v. Hesco Bastion Environmental, Inc. found an increased fair value of the shareholders’ shares through the appraisal proceeding.[113] In Laidler, the increased valuation turned on the unwillingness of the Chancery Court to exclude entirely non-recurring revenue.[114]

The company’s expert provided a valuation that sought to back “out certain revenues” that former management indicated were non-recurring, such as those generated from the BP oil spill.[115] Rather than make estimates based on unpredictable “non-recurring” or “recurring” environmental disasters in determining future cash flows, the Court instead averaged past cash flows from the prior three years.[116]

These cases suggest that appraisal rights are worth the risk when there is a clear non-subjective basis for arguing for a higher value. When shareholders can readily designate the subjective factors imbedded in the appraisal, they are more likely to obtain a greater price per share than what was received in the merger.

III.       Conclusion

The court’s determination of fair value is subjective in nature. Nonetheless, certain elements of the valuation process have become more predictable. For the most part, the courts use the cash value with the least amount of speculation involved. Moreover, the courts have appeared unsympathetic to efforts to reduce value through the complete exclusion of non-recurring revenue.

To the extent that the factors used in determining valuation become more objective, shareholders can better predict the likelihood of a higher valuation. The results over the past five years suggest that shareholders have succeeded in doing so. In the reported cases, the Court of Chancery rarely places a fair value at less than the price obtained in the offering. Finally, greater objectivity benefits all shareholders. Where companies can predict the outcome of a valuation process, they will know that a price below that amount will encourage the exercise of appraisal rights. As scholars have noted, the “mere threat of invoking appraisal rights can lead an acquirer to increase the offer consideration.”[117]

 

Appendix

The table below expresses the price paid in offering, the price obtained through appraisal, and the difference between the two. It also provides active links to each of the cases.

Appraisal Actions 2010–2014

Year

Case

Citation

Price Paid in Offering

Price Obtained through Appraisal

Difference in Price

Percentage Increase

2014

Laidler v. Hesco Bastion Envtl.

2014 WL 1877536 (Del. Ch. 2014)

$207.50 per share

$364.24 per share

+ $156.74

75.5%

2014

Dent v. Ramtron Int’l Corp.

2014 WL 2931180 (Del Ch. 2014)

$3.10 per share

$3.10 per share

0

0

2013

Merion Capital, L.P. v. 3M Cogent, Inc.

2013 WL 3793896 (Del. Ch. 2013)

$10.50 per share

$10.87 per share

+ $0.37

3.5%

2013

In re Trados Incorporated Shareholder Litigation

73 A.3d 17 (Del. Ch. 2013)

$0.10 per share

$0.00 per share

– $0.10

Decrease

2013

Towerview LLC v. Cox Radio, Inc.

No. 4809–VCP, 2013 WL 3316186 (Del. Ch. 2013)

$4.80 per share

$5.75 per share

+ $0.95

19.8%

2013

In re MFW Shareholders Litigation

67 A.3d 496 (Del. Ch. 2013)

$25.00 per share

$25.00 per share

0

0

2013

Huff Fund Investment Partnership v. CKx, Inc.

No. 6844–VCG, 2013 WL 5878807 (Del. Ch. 2013)

$5.50 per share

$5.50 per share

0

0

2012

In re Appraisal of Orchard Enterprises, Inc.

2012 WL 2923305 (Del. Ch. 2012)

$2.05 per share

$4.67 per share

+ $2.62

127.8%

2012

Gearreald v. Just Care, Inc.

No. 5233-VCP, 2012 WL 1569818 (Del. Ch. 2012)

$40 M (whole price)[118]

$34,244,570 (whole price)

– $5,755,430 (whole price)

Decrease

2011

In re Smurfit-Stone Container Corp. Shareholder Litigation

37 Del. J. Corp. L. 261 (Del. Ch. 2011)

$35.00 per share

$35.00 per share

0

0

2010

Global GT LP v. Golden Telecom, Inc.

993 A.2d 497 (Del. Ch. 2010)

$105.00 per share

$125.49 per share

+ $20.49

19.5%

2010

In re Sunbelt Beverage Corp. Shareholder Litigation

No. 16089–CC, 2010 WL 26539 (Del. Ch. 2010)

$45.83 per share

$114.04 per share

+ $68.21

148.8%

 

 


        *     J.D. and Corporate and Commercial Law Certificate Candidate, May 2015.

       [2].     Kaye v. Pantone, Inc., 395 A.2d 369, 374 (Del. Ch. 1978).

       [3].     See infra Part I.A.

       [4].     Steven Davidoff Solomon, Fine Legal Point Poses Challenge to Appraisal Rights, Dealbook, New York Times (May 30, 2014, 2:59 PM) (discussing how Merion Capital, a hedge fund, “is exercising appraisal rights as a business strategy.”). See also Latham & Watkins, LLP, Appraisal Arbitrage: When Will it Become a New Hedge Fund Strategy?, M&A Deal Commentary, 1–2 (May 2007),  (suggesting that the Delaware Court of Chancery’s decision in In re Appraisal of Transkaryotic Therapies, Inc. created a “new ‘market’ in appraisal rights” by holding that investors who purchase shares in the target company after the record date “may assert appraisal rights so long as the aggregate number of shares for which appraisal is being sought is less than the aggregate number of shares that either voted no on the merger or didn’t vote on the merger.”), available at   http://www.lw.com/upload/pubcontent/_pdf/pub1883_1.pdf. See also In re Appraisal of Transkaryotic Therapies, Inc., No. Civ.A. 1554–CC, 2007 WL 1378345 (Del. Ch. May 2, 2007).

       [5].     The Growth of Appraisal Litigation in Delaware, Wilson Sonsini Goodrich & Rosati (Nov. 18, 2013), https://www.wsgr.com/WSGR/Display.aspx?SectionName=publications/PDFSearch/wsgralert-delaware-appraisal-litigation.htm. Investors are able to do so because of the Court of Chancery’s decision in Transkaryotic, wherein the court discussed the availability of the remedy for beneficial holders of shares acquired after the record date. See generally Transkaryotic Therapies, 2007 WL 1378345.

       [6].     See Transkaryotic Therapies, 2007 WL 1378345. See generally George S. Geis, An Appraisal Puzzle, 105 Nw. U. L. Rev. 1635 (2011) (discussing the effects of Transkaryotic’s holding on appraisal proceedings).

       [7].     See supra note 4.

       [8].     See infra Part II.

       [9].     See infra Part II.

     [10].     See generally Del. Code Ann. tit. 8, §§ 251–567 (2013).

       S.     ection 1.01                [11] Andra v. Blount, 772 A.2d 183, 192 n.22 (Del. Ch. 2000).

     [12].     See Del. Code Ann. tit. 8, § 262 (2013).

     [13].     Valuation of Dissenters’ Stock Under Appraisal Statutes, 79 Harv. L. Rev. 1453, 1453 (1966). See also Barry M. Wertheimer, The Shareholders’ Appraisal Remedy and How Courts Determine Fair Value, 47 Duke L.J. 613, 618–19 (1998) (“Prior to the enactment of [appraisal] statutes, the general rule in most states was that a corporation could not merge or consolidate with another corporation without the unanimous consent of its shareholders.”).

     [14].     Wertheimer, supra note 13, at 618.

     [15].     See Mary Siegel, Back to the Future: Appraisal Rights in the Twenty-First Century, 32 Harv. J. on Legis. 79, 91 (1995) (discussing the history of appraisal rights). By 1927, approximately twenty states had them in place. Id.

     [16].     See Robert B. Thompson, Exit, Liquidity, and Majority Rule: Appraisal’s Role in Corporate Law, 84 Geo. L. J. 1, 14–25 (1995) (discussing the so-called “renaissance of appraisal rights” in the 1960s). Thompson asserts that the renaissance resulted from shareholders’ infrequent use of the remedy, in response to which states implemented important changes in the process. Id.

     [17].     See infra Part I.B.

     [18].     See infra Part I.C.

     [19].     See infra Part I.D.

     [20].     Harvard Law Review Association, Valuation of Dissenters’ Stock Under Appraisal Statutes, 79 Harv. L. Rev. 1453, 1453 (1966).

     [21].     Del. Code Ann. tit. 8, § 262(b) (2013). The statute mandates that, subject to certain exceptions, “[a]ppraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation.” Id. See also id. at §§ 251–54, 257–58, 263–64. A corporation may also voluntarily provide appraisal rights for changes to any class or series of shares if set out in the certificate of incorporation. See Del. Code Ann. tit. 8, § 262(c) (2013). Only a few jurisdictions follow Delaware’s model in recognizing mergers as the “sole statutorily-required appraisal trigger.” Mary Siegel, An Appraisal of the Model Business Corporation Act’s Appraisal Rights Provisions, 74–WTR Law & Contemp. Probs. 231, 234 (2011) (as of the date of the article, only two jurisdictions followed Delaware’s approach). The MBCA approach provides more opportunity for shareholders to seek appraisal rights than the Delaware statute. See Model Bus. Corp. Act § 13.02(a)(1)–(8) (2002) (shareholders entitled to appraisal rights in the event of a(n): (1) merger; (2) share exchange; (3) disposition of assets; (4) amendment of the articles of incorporation; (5) domestication; and (6) conversion). Ninety-six percent of jurisdictions follow the MBCA’s approach. Siegel, supra, at 235.

     [22].     It also exempts the remedy for “any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation.” Del. Code Ann. tit. 8, § 262(b)(1) (2013).

     [23].     See id. at §§ 251–52, 254–58, 263–64. The types of mergers that trigger appraisal rights include, among others, certain mergers of domestic or foreign corporations, merger of domestic corporation and joint-stock or other association, merger of domestic nonstock corporations, and merger of domestic corporations and partnerships.

     [24].     Id. at § 262(b)(1) (appraisal rights do not apply to the shares of any corporation listed on a national securities exchange or held by more than 2,000 record holders). See also R. Franklin Balotti and Jesse A. Finkelstein, § 9.43 The Availability of Statutory Appraisal Rights, in 1 Balotti & Finkelstein’s Delaware Law of Corporations and Business Organization (2014). Other exceptions include: fractional depository receipts or cash in lieu of fractional shares described in the shares of stock or deposit receipts exception; or any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in foregoing sections. Del. Code Ann. tit. 8, § 262(b)(2) (2013).

     [25].     See Del. Code Ann. tit. 8, § 262(b)(2) (2013). Specifically, the provision “provides appraisal rights in any merger where the holders of shares receive cash or securities other than stock of a widely held corporation, stock of the surviving corporation, or a mix of the two.” Balotti & Finkelstein, supra note 24.

     [26].     Del. Code Ann. tit. 8, § 262(c) (2013).

     [27].     See id. at § 262(a).

     [28].     See id.

     [29].     See id. at § 262(d)(1).

     [30].     See id. See also R. Franklin Balotti and Jesse A. Finkelstein, § 9.44 Procedural Aspects of the Delaware Appraisal Statute, in 1 Balotti & Finkelstein’s Delaware Law of Corporations and Business Organization (2014).

     [31].     See Del. Code Ann. tit. 8, § 262(d)(1) (2013).

     [32].     See Balotti & Finkelstein, supra note 30. Quasi appraisal actions arise where the statutory requirements for an appraisal action have not been met but dissenting shareholders are nonetheless allowed to petition a court for a determination of fair value. Robert B. Schumer, Quasi-Appraisal: The Unexplored Frontier of Stockholder Litigation?, Harvard Law School Forum on Corporate Governance and Financial Regulation (Scott Hirst, ed., Feb. 21, 2012, 9:34 AM), http://blogs.law.harvard.edu/corpgov/2012/02/21/quasi-appraisal-the-unexplored-frontier-of-stockholder-litigation/. The availability of a quasi-appraisal differs from case to case, but is generally recognized in cases where the corporation fails to make the requisite disclosures, and it has directly affected the shareholders’ decision of whether to seek an appraisal. Id.

     [33].     Balotti & Finkelstein, supra note 30.

     [34].     In re Orchard Enters., Inc. Stockholder Litig., 88 A.3d 1, 17 (Del. Ch. 2014).

     [35].     See generally Gilliland v. Motorola, Inc., 859 A.2d 80 (Del. Ch. 2004) (holding that Motorola, Inc. did not satisfy its disclosure duty when it failed to provide any financial information).

     [36].     Del. Code Ann. tit. 8, § 262(d)(1) (2013).

     [37].     Balotti & Finkelstein, supra note 30. Specifically, the pre-merger notice informs the corporation of the number of dissenting shareholders and the number of shares demanding an appraisal. Id. If too many shareholders dissent, acquirers may kill the deal. Commonly, public companies make it a closing condition that appraisal claims do not exceed 5-10 percent of the total number of shares. Latham & Watkins, LLP, supra note 4, at 3.

     [38].     Del. Code Ann. tit. 8, § 262(d)(1) (2013). There is, however, no “specific” form the shareholder must use. Id.

     [39].     Balotti & Finkelstein, supra note 30. Within ten days after approval of the transaction, the surviving corporation must inform each dissenting shareholder who submitted a written appraisal as of the merger’s effective date. See Del. Code Ann. tit. 8, § 262(d)(1) (2013).

     [40].     See Del. Code Ann. tit. 8, § 262(d)(1) (2013). Thereafter, withdrawal requires written consent of the corporation. Id.

     [41].     See id. at § 262(e). The shareholder must make the request within 120 days from the effective date of the merger. Id. See also Balotti & Finkelstein, supra note 30. The corporation must mail the statement within ten days after the end of the delivery period for demands for appraisal, or within ten days of the shareholder’s request. Id.

     [42].     See Del. Code Ann. tit. 8, § 262(e) (2013). If filed by a dissenting shareholder, the shareholder must service a copy of the petition to the corporation. Id.

     [43].     See Del. Code Ann. tit. 8 § 262(f) (2013). The Court of Chancery may hold a hearing and determine the number of shareholders who have complied with the statutory requirements and are therefore entitled to appraisal rights. See id. at § 262(g). Every dissenting shareholder bears the burden of proving fulfillment of the statutory prerequisites. Balotti & Finkelstein, supra note 30.

     [44].     See Del. Code Ann. tit. 8, § 262(h) (2013).

     [45].     In re Appraisal of the Orchard Enters., Inc., No. 5713–CS, 2012 WL 2923305, at *5 (Del. Ch. July 18, 2012), aff’d, Orchard Enters., Inc. v. Merlin Partners LP, 2013 WL 1282001 (Del. Mar. 28, 2013).

     [46].     In re Nine Sys. Corp. S’holders. Litig., No. 3940–VCN, 2014 WL 4383127, at *38 (Del. Ch. Sept. 4, 2014).

     [47].     See Del. Code Ann. tit. 8, § 262(h) (2013).

     [48].     See Appraisal of the Orchard Enters., 2012 WL 2923305, at *5.

     [49].     See id. at *3.

     [50].     See, e.g., Appraisal of the Orchard Enters., 2012 WL 2923305 (wherein the appraisal process took three years from the date of the company’s initial payment to shareholders).

     [51].     See Del. Code Ann. tit. 8, § 262(h) (2013).

     [52].     See id. Courts allow the rate unless there is good cause not to. Id.

     [53].     M.P.M. Enters. v. Gilbert, 731 A.2d 790, 795 (Del. 1999).

     [54].     Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 298 (Del. 1996).

     [55].     R. Franklin Balotti and Jesse A. Finkelstein § 9.45 Valuation in a Delaware Appraisal Proceeding, in 1 Balotti & Finkelstein’s Delaware Law of Corporations and Business Organization (2014).

     [56].     Del. Code Ann. tit. 8, § 262(h) (2013).

     [57].     See, e.g., Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1145 (Del. 1989) (“The application of a discount to a minority shareholder is contrary to the requirement that the company be viewed as a ‘going concern.’”).

     [58].     Notably, the Model Business Corporation Act’s appraisal provision seeks to increase economical and satisfying solutions in appraisal actions by “motivating the parties to settle their differences in private negotiations without resort to judicial appraisal proceedings.” Model Bus. Corp. Act § 13.01 cmt. 1 (2002) (emphasis added).

     [59].     Cede & Co., 684 A.2d at 296 (citing Weinberger v. UOP, Inc., 457 A.2d 701, 712 (Del. 1983)).

     [60].     Appraisal and Alternative Valuation Methods, Practical Law, http://us.practicallaw.com/2-568-9286 (last visited Dec. 11, 2014). Other methods include: the comparable company approach; the segmented valuation approach; the comparable acquisition approach; earnings value; market value; and asset value. See generally Harvard Law Review Association, supra note 20.

     [61].     Appraisal and Alternative Valuation Methods, Practical Law, http://us.practicallaw.com/2-568-9286 (last visited Dec. 29, 2014). A “comparable company” is typically in the same industry with similar business risk, and preferably has a single line of business. CFA Glossary, CFA Institute, 8, http://www.cfainstitute.org/learning/tools/glossary/Pages/index.aspx?SelectedLetter=C (last visited Jan. 2, 2015).

     [62].     Appraisal and Alternative Valuation Methods, Practical Law, http://us.practicallaw.com/2-568-9286 (last visited Dec. 29, 2014). See also Merion Capital, L.P. v. 3M Cogent, Inc., Civ.A. No. 6247–VCP, 2013 WL 3793896, at *6 (Del. Ch. July 8, 2013).

       S.     ection 1.02                [63] In re U.S. Cellular Operating Co., No. Civ.A 18696–NC, 2005 WL 43994, at *17 (Del. Ch. Jan. 6, 2005).

     [64].     Appraisal and Alternative Valuation Methods, Practical Law, http://us.practicallaw.com/2-568-9286 (last visited Dec. 29, 2014).

     [65].     Wertheimer, supra note 13, at 628.

     [66].     Balotti & Finkelstein, supra note 55.

     [67].     See generally U.S. Cellular Operating Co., 2005 WL 43994. The amount does not take into account the taxes paid on any earnings. See In re Radiology Assocs., Inc. Litig., 611 A.2d 485, 495 (Del. Ch. 1991) (“Therefore, in applying the discounted cash flow approach, I use cash flows that neither include a deduction for taxes nor a corresponding adjustment (i.e., an addition) for taxes.”).

     [68].     See Jay W. Eisenhofer and John L. Reed, Valuation Litigation, 22 Del. J. Corp. L. 37, 113 (1997).

     [69].     See U.S. Cellular Operating Co., 2005 WL 43994, at *15.

     [70].     Balotti & Finkelstein, supra note 52 (quoting Crescent/Mach I P'ship, L.P. v. Turner, No. Civ.A. 17455–VCN, 2007 WL 1342263 (Del. Ch. May 2, 2007).

     [71].     Id. The corporation’s cost of debt and its cost of equity are the two major components of the weighted average cost of capital. Id. They are generally averaged “based on the company’s actual capital structure on the date of the merger.” Id.

     [72].     Balotti & Finkelstein, supra note 55. For example, excess working capital—the “amount of working capital beyond the amount an entity needs to fund its business”—is a non-operating asset. In re Radiology Assocs., Inc. Litig, 611 A.2d 485, 495–96 (Del. Ch. 1991).

     [73].     Balotti & Finkelstein, supra note 55.

     [74].     Id. (internal quotation marks omitted).

     [75].     Wertheimer, supra note 13, at 629.

     [76].     Id.

     [77].     Id.

     [78].     See Eisenhofer & Reed, supra note 68.

     [79].     Wertheimer, supra note 13, at 630.

     [80].     Id. at 629.

     [81].     CIV. A. No. 8282, 1990 WL 109243 (Del. Ch., Aug. 1,1990).

     [82].     See id. at *8–9.

     [83].     Id. at *9.

     [84].     Balotti & Finkelstein, supra note 30 (quoting Ala. By-Prods. Corp. v. Cede & Co., 657 A.2d 254, 258–59 (Del. 1995)). For the most part, this change in shareholder status occurs on the effective date of the merger. Id.

     [85].     Gilliand v. Motorola, Inc., 873 A.2d 305, 312 (Del. Ch. 2005).

     [86].     Id. Under the Model Business Corporation Act, in contrast, a dissenting shareholder must receive an amount in cash equal to the corporation’s estimate of fair value within 30 days. See Model Bus. Corp. Act § 13.24 (2002). If the dissenting shareholders demand further payment and the court proceeds with an appraisal hearing, the shareholders will receive the remainder of the “fair value” at the end of the proceeding. Id. Unlike under the Delaware statute, this means that the only payment withheld from dissenting shareholders is the disputed amount. Id.

     [87].     Balotti & Finkelstein, supra note 30.

     [88].     Specifically, “[t]he costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances.” Del. Code Ann. tit. 8, § 262(j) (2013). The court can charge the expenses “pro rata against the value of all the shares entitled to an appraisal.” Id.

     [89].     Absent bad faith, the court typically allocates court costs to the surviving corporation. Siegel, supra note 21, at 240. See also Tri-Cont’l Corp. v. Battye, 74 A.2d 71, 77 (Del. 1950); Meade v. Pac. Gamble Robinson Co., 58 A.2d 415, 418 (Del. 1948).

     [90].     See Merion Capital, L.P. v. 3M Cogent, Inc., Civ.A. No. 6247–VCP, 2013 WL 3793896, at *25 (Del. Ch. Mar. 19, 2013).

     [91].     Id. (internal citations omitted).

     [92].     See Del. Code Ann. tit. 8, § 262(h) (2013). The rate is compounded quarterly. Id.

     [93].     Id. For example, the court may choose not to apply the rate if it finds that the shareholder pursued the appraisal in bad faith.

     [94].     2013 WL 3793896.

     [95].     See id. at *n.205. See also infra Table: Appraisal Actions 2010–2014.

     [96].     Merion Capital, L.P., 2013 WL 3793896, at *n.205.

     [97].     Daniel E. Wolf et al.,, Appraisal Rights—The Next Frontier in Deal Litigation?, Kirkland M&A Update, Kirkland & Ellis, 2 (May 1, 2013), http://www.kirkland.com/siteFiles/Publications/MAUpdate_050113.pdf.

     [98].     Wertheimer, supra note 13, at 619–20.

     [99].     Wertheimer, supra note 13, at 620 n.32 (citing Joel Seligman, Reappraising the Appraisal Remedy, 52 Geo. Wash. L. Rev. 829, 829 n.3 (1984)). This was the case although there were over 16,000 mergers within the United States. Id.

   [100].     Wertheimer, supra note 13, at 620. In part, this may have resulted from a shift in the type of consideration used in the transactions, with consideration increasingly paid in cash. One report noted that in approximately 90% of relevant transactions over the past few years, acquirers have paid in cash. See Wolf et al., supra note 97, at 1. The type of consideration is important, since ordinarily mergers with public companies are exempt from appraisal rights, except when paid in cash. See supra Part I. See also Del. Code Ann. tit. 8, § 262(b) (2013).

   [101].     See infra Table: Appraisal Actions 2010–2014.

   [102].     See infra Table: Appraisal Actions 2010–2014.

   [103].     See infra Table: Appraisal Actions 2010–2014.

   [104].     73 A.3d 17 (Del. Ch. 2013).

   [105].     See id. at 69–70.

   [106].     See id. at 70.

   [107].     C.A. No. 5233–VCP, 2012 WL 1569818 (Del. Ch. Apr. 30, 2012).

   [108].     See id. at *1.

   [109].     Id. at *3.

   [110].     See id. at *1, *3 ($40 million – $6 million held in escrow = $34 million fair value, and the court determined that $34,244,570 was the fair value of the company).

   [111].     Appraisal of the Orchard Enters., 2012 WL 2923305, at *3 (“CAPM” standing for capital asset pricing model).

   [112].     See id. at *1, *3. The court chose to use one method, rather than “shroud [its] determination of fair value in the false precision of averaging the results of three different methods of calculating cost of capital in coming to a single discount rate…” Id. at *3.

   [113].     See infra Table: Appraisal Actions 2010–2014.

   [114].     Laidler v. Hesco Bastion Envtl., Inc., Civ.A. No. 7561–VCG, 2014 WL 1877536 (Del. Ch. Mar. 28, 2014).

   [115].     Id. at *5.

   [116].     Id. at *11.

   [117].     Joseph Glatt, Is it Worth it? The Value of Delaware Appraisal Rights to the Activist Investor, Activist Investing Developments, Schulte Roth & Zabel, LLP, 1 (2007), http://www.srz.com/files/News/ebd7562a-5d91-41ec-84c2-4b2b280f80dc/Presentation/NewsAttachment/fcf3914f-2885-4af4-b24a-23804876290f/filesfilesActivist_summer07_1_Is_it_worth_it.Glatt.pdf. At the time of publication of this Article, the Corporation Law Council has proposed certain amendments to the Delaware General Corporation Law referenced herein, particularly relating to fee-shifting bylaws. See 2015 DE S.R. 12. The proposed legislation arose from the Delaware Supreme Court’s decision in ATP Tour Inc. v. Deutscher Tennis Bund, et al., 91 A.3d 554 (Del. 2014). See Memorandum of Explanation of Council Legislative Proposal, available at http://www.andrewskurth.com/assets/htmldocuments/15137_Proposed_DGCL_Amendments_Rel_Docs_2.pdf.

   [118].     This denotes fair value of the company as a whole. The court did not compute fair value per share (there were 533,792 Series A preferred and 1,479,551 common shares). Gearreald, 2012 WL 1569818, at *1.