June 1, 2018

Quasi-Appraisal: Rise in Claims Means More Unpredictability?

Common law “quasi-appraisal” claims have become more common in Delaware M&A litigation, and this Blank Rome memo says that the increasing prevalence of these claims could alter the risk profile of deals. This excerpt summarizes how quasi-appraisal actions change the potential liability landscape:

While the amount involved can be high, appraisal actions are typically limited to a small percentage of stockholders. Only stockholders who timely perfected their appraisal rights are permitted to obtain an award of “fair value” instead of the merger price (and of course, “fair value” could be less than the merger price—a risk many stockholders are unwilling to take). If “fair value” is determined by the court to be higher than the merger price, the buyer is responsible to make those additional payments to the dissenting stockholders. As such, the statutory threshold for the perfection of appraisal rights can provide a buyer with a level of risk predictability in a transaction.

But, what about when, for whatever reason, stockholders do not timely perfect appraisal rights under Section 262? Can such stockholders use the concept of quasi-appraisal as a substitute for appraisal? In such a quasi-appraisal claim, a stockholder can bring a claim (likely dressed up as a breach of fiduciary duty claim, i.e., not enough information provided to allow one to make a decision on the exercise of appraisal rights) without the need to exercise appraisal rights under the statute.

Because quasi-appraisal is rooted in fiduciary duty actions, directors/former directors are typically the target of such actions and may be on the hook for any difference in the merger price and the determined “fair value.” Quasi-appraisal actions are often pursued as class actions on behalf of most of the stockholders, meaning directors may face crushing personal liability if the court were to find liability and award quasi-appraisal damages.

The memo points out that continued growth in quasi-appraisal claims may result in a much less predictable environment than the one typically experienced when dealing with traditional appraisal claims. Instead of a limited number of dissenters, buyers may find themselves facing post-closing class actions alleging breaches of fiduciary duty by the sellers board. In many instances, the buyer will have indemnity responsibility for these claims.

John Jenkins