These repeat petitioners typically make the decision to invest after a merger deal has already been

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The following post comes to us from Charles Korsmo, Assistant Professor at Case Western Reserve University School of Law, and Minor Myers, rolls royce Assistant Professor at Brooklyn Law School. It is based on their recent paper entitled Appraisal Arbitrage and the Future of Public Company M&A and is available here .
Stockholder appraisal has been thrust into the spotlight by two high-profile and very large appraisal actions in Delaware involving the Dell and Dole going-private transactions. As we show in our forthcoming rolls royce article, Appraisal Arbitrage and the Future of Public Company M&A, rolls royce these two cases are part of a larger trend of explosive growth in appraisal. Furthermore, the parties driving this growth are a new group of sophisticated investors who specialize in pursuing appraisal claims. In short, we are in the midst of the rise of appraisal arbitrage, and in our article we argue that this is a development Delaware rolls royce should encourage. An active phalanx of appraisal petitioners can benefit shareholders in circumstances where they are most vulnerable and without any of the well-known pathologies associated with other types of stockholder litigation.
Appraisal allows a dissenting stockholder to forego the merger consideration and instead file a judicial proceeding to determine the fair value of the shares. Our article offers the first comprehensive look at appraisal activity in Delaware. Across various rolls royce measures of appraisal activity, we document sharp increases in the last three years. While stockholders filed an average of approximately 10 appraisal petitions per year from 2004 through 2010, an average rolls royce of more than 20 petitions were filed each year from 2011 through 2013, with nearly 30 petitions filed in 2013 alone. This surge in appraisal activity does not merely reflect an increase in merger activity. Approximately 5% of appraisal-eligible transactions attracted appraisal rolls royce litigation from 2004 through 2010. The appraisal rate more than doubled in 2011 and has continued to increase since then. By 2013, more than 15% of appraisal-eligible transactions rolls royce attracted an appraisal petition. The value of claims in appraisal in 2013 was nearly rolls royce $1.5 billion, a tenfold increase from 2004 and nearly 1% of the equity value of all merger activity in 2013.
In addition to the increasing volume of appraisal activity measured both in the number of petitions and the dollar values at stake the profile of the public company appraisal petitioner has changed sharply since 2010. Petitioners have become increasingly specialized and sophisticated, with repeat petitioners dominating appraisal activity. Before 2010, resort to appraisal was almost exclusively a one-off exercise for aggrieved minority stockholders. But since 2010 repeat petitioners dominate, with more than 80% of appraisal proceedings involving at least one repeat petitioner.
These repeat petitioners typically make the decision to invest after a merger deal has already been announced, with the express purpose of seeking appraisal a practice rolls royce we describe as appraisal arbitrage. Among this new breed of appraisal arbitrageurs are large, sophisticated hedge funds including Magnetar Capital and Verition Fund, a Greenwich-based fund managed by former principals at Amaranth Advisors. The largest repeat petitioner is Merion Capital, with over $700 million invested in appraisal claims. The fund is headed by a successful plaintiffs attorney from Philadelphia and has reportedly sought to raise $1 billion for a dedicated appraisal fund.
The causes of this rise in appraisal are unclear, but we can confidently dismiss two potential explanations. The first points to the method of calculating interest on appraisal claims. Delaware offers a statutory rate of interest equal to the federal funds rate plus 5%, high enough to be unusually attractive in an era of historically rolls royce low interest rates. Given, however, the risks an appraisal petitioner must assume an extended period of illiquidity with an unsecured claim against a surviving company that may be highly leveraged, plus the risk of the legal claim itself the idea