This Wachtell memo discusses the Chancery Court’s recent decision in In re Appraisal of SWS Group (Del. Ch; 5/17) – where Vice Chancellor Glasscock held that the “fair value” of the seller’s stock for appraisal purposes was almost 20% lower than the merger price. Wachtell points out that this result came as particularly bad news for a group of arbs who bought in for the sole purpose of dissenting from the deal:
After the merger was announced, arbitrageurs raised funds solely to finance an appraisal action, wooing investors with assurances that the Delaware courts were extremely unlikely to assign fair value below deal price. After raising tens of millions on that basis, the arbitrageurs acquired 7.4 million shares after the deal announcement and before the merger closing — approximately 15% of total shares outstanding — over a period in which SWS traded at an average share price of $7.22. Had the arbitrageurs simply voted for the merger, their investors would have received merger consideration now worth $8.30 per share.
The Court concluded that the stock was worth $6.38 per share. Ouch! That’ll leave a mark.
Appraisal arbitrage has been a winning strategy in Delaware in recent years – there’s a big potential upside, and Delaware’s generous statutory interest rate has in the past served as a nice cushion on the downside. But this case shows that you can also lose big when you play poker with somebody’s stock as your chips. We’re posting memos in our “Appraisal Rights” Practice Area.
– John Jenkins