DealLawyers.com Blog

Last month, I blogged about the Delaware Chancery Court’s decision in BCIM Strategic Value Master Fund v. HFF, (Del. Ch.; 2/22), in which Vice Chancellor Laster determined to apply an upward adjustment to the merger consideration in determining the fair value of a share. While he did not find fault with the deal process, the Vice Chancellor did conclude that an increase in the target’s value between signing and closing should be reflected in the fair value determination.

This Cooley blog reviews the decision and offers up some key takeaways – one of which is the potential that it creates for appraisal arbitrage in some mixed consideration deals.  The blog notes that this deal involved a combination of cash & stock, with each share of the target’s common stock being converted into the right to receive $24.63 in cash and 0.1505 shares of buyer’s common stock. At signing, the value of buyer’s stock implied a deal price of $49.16 per share (based on the buyer’s trading price on the date of signing).  This excerpt says that it’s the use of a fixed conversion rate for buyer’s stock that creates the potential for appraisal arbitrage:

It is the use of spot trading prices to measure the value of buyer’s stock in a mixed consideration transaction that may create an opportunity for appraisal arbitrage. Had the deal consideration been comprised entirely of cash or had the exchange rate for the stock portion of the consideration been floating, rather than fixed, no upward adjustment would have been warranted because the determined fair value at closing ($46.59/share) was less than the implied deal price at signing of $49.16/share.

Additionally, an appraisal proceeding could have been wholly avoided had the transaction been structured as an all-stock deal or had target’s stockholders had the right to elect between cash and stock consideration and there was no cap on the amount of stock consideration a stockholder could elect (i.e., each stockholder could elect to receive 100% stock consideration).

The blog says that the case may create appraisal arbitrage opportunities for cash & stock deals even absent a change in target value between signing and closing. That’s because it creates an incentive for stockholders to argue that the value of consideration delivered at closing was less than fair value based solely on a decline in the buyer’s stock price between signing and closing.

– John Jenkins