February 21, 2014

New Appraisal Decision Rejects Attempt to Stop Statutory Interest Rate from Accruing

Here’s news from Kevin Miller of Alston & Bird:

Recently, a number of investors as well as certain hedge funds have adopted a strategy of seeking an appraisal of the fair value of their shares in a target corporation acquired via merger merely to earn the currently very attractive statutory rate of interest on the appraised value of those shares from date the merger closes to the date of payment of the judicially appraised value. In the current low interest rate environment, the relatively high statutory interest rate of 5% above the Fed. Reserve Discount Rate may generate an attractive return even if the appraised value is less than the merger consideration.

In a new case – Huff Fund Investment Partnership v. CKx, Civil Action No. 6844-VCG (Del Ch; 2/12/14) – the respondent target corporation valiantly but unsuccessfully attempted to stop interest from accruing at the overly generous statutory rate on that portion of the value of its shares that it was not challenging in the appraisal proceeding and was willing to pay immediately. Here is an excerpt:

The Respondent requests that I order the Petitioner to accept an unconditional tender of $3.63 per share, which represents its expert’s base case scenario for valuing CKx, plus accrued interest. In other words, the Respondent agrees that under no circumstances could CKx be valued at less than $3.63 per share, and it is willing to tender that amount to stop the accrual of interest on that payment, which interest is currently accruing at five and three-quarters percent, five percent above the Federal Reserve discount rate. In effect, the Respondent seeks the equitable analog of an offer-of-judgment rule, which allows Superior Court, but not Chancery, litigants the ability to limit the adverse effects of a verdict.

In addition to agreeing that the Petitioner would not be required to return the tendered amount to the Respondent, the Respondent has offered to indemnify the Petitioner for any negative tax consequences incurred as a result of accepting a partial payment—an offer conditioned on the Petitioner turning over certain tax decisions to the discretion of the Respondent. Despite those concessions, the Petitioner continues to reject the Respondent’s offer, and for the reasons explained below, I deny the Respondent’s request for an order requiring the Petitioner to accept it. . . .

I am aware that equitable principles may support such a tolling of interest, in certain situations. However, where the General Assembly has provided a specific standard governing interest awards, such a statutory directive must trump those considerations.

This decision makes it clear that the Delaware legislature needs to act – hopefully sooner rather than later – to address the issues created by an overly generous statutory interest on the appraised value of shares. Otherwise, given the current low interest rate environment, we will continue to see a large number of long, drawn-out appraisal claims burdening the Delaware courts.