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Fair deal

8 January 2015 By Reynolds Holding

It turns out lawsuits can actually add value to deals. A recent ruling against genealogy website Ancestry.com makes it easier to sue for higher merger prices in so-called appraisal rights cases. Unlike most M&A claims, these ones are typically strong – and potentially a good check on the M&A process.

Appraisal rights allow stockholders who opposed a deal to ask a judge to set the price for their shares. In Tuesday’s ruling on the 2012 Ancestry.com buyout, a Delaware jurist said Merion Capital could exercise those rights, even though its shares were technically owned by stock-certificate aggregator Cede and the hedge fund couldn’t prove how they were voted. That didn’t matter, the judge ruled, because Cede voted more shares against the deal than Merion eventually owned.

The decision could prompt even more appraisal cases, a development that might normally be bad for M&A. Some 95 percent of deals face lawsuits, according to Cornerstone Research. And with notable exceptions like the conflict-of-interest challenge to Kinder Morgan’s $21 billion purchase of pipeline operator El Paso in 2012, many suits are filed merely for their nuisance value.

Appraisal actions are surprisingly successful, though. Delaware courts have granted investors increases between 8.5 percent and 149 percent above the merger price in seven of the nine cases decided since 2010, according to New York law firm Fried Frank. Most had low deal premiums or were going-private transactions that arguably stiffed minority shareholders.

It makes sense for investors to bring only strong claims. Cases can consume years of costly court wrangling. And holders take the risk of an award below the merger price. The upside is that statutory interest on their claims accrues at 5 percent plus the federal funds rate, currently an attractive return.

The potential payouts seem enough to have driven a surge in Delaware appraisal filings, from about 10 in 2010 to nearly 30 in 2013, according to a Brooklyn Law School study. The value of claims in 2013 was almost $1.5 billion.

Profit motive aside, the cases may give minority shareholders an effective check on unfair transactions and deter abusive deals generally. It’s the rare litigation strategy that can benefit investors more than their lawyers.

 

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