The Appraisal Trade Is Back

For a while, appraisal arbitrage was a great little trade. Delaware — where most US public companies are incorporated — has a law that says that, if a company sells itself in a merger for cash, shareholders who object to the deal can sue for the fair value of their shares. If a company agrees to merge for $10 a share, but you are a shareholder and think it’s worth $15, you can vote no on the deal, but if a majority of shareholders vote yes then the deal will close anyway. You can then go to court and demand $15, and if the judge agrees with you then you’ll get your $15.

What made it a great trade was interest. If you sought appraisal, you rejected the deal price and took your chances in court instead. The acquirer would cash out everyone else’s shares at $10, but you wouldn’t get the $10; you’d go to court. You’d argue your case, and then, months or years later, there would be a result. Either you would win (the judge would agree with you that the company was worth $15) and you’d get your $15, or you’d lose (the judge would agree with the acquirer that the company was worth $10) and you’d get $10, or something in between (you’d get $12 or whatever). But in any case, the Delaware law provides that you get interest on the money, from the time the deal closed (and everyone else got their $10) to the time you get your money ($10 or $12 or $15 or whatever you get). And the interest is set at the Federal Reserve’s discount rate plus 5%, compounded quarterly.1