In determining fair value, Delaware Court of Chancery and Delaware Supreme Court take cues from deal price.

On February 12, 2015, the Delaware Supreme Court affirmed the Court of Chancery’s ruling in Huff Fund Investment Partnership v. CKx, Inc., in a decision that could potentially slow the surge in appraisal proceedings. In recent years, “appraisal arbitrage” has developed into a burgeoning industry among hedge funds seeking to take advantage of favorable case law on valuation, standing to assert the right with respect to shares acquired post-meeting and a beneficial statutory interest rate. Such arbitrageurs buy shares in a transaction about to close and file suit claiming that the fair value of the company is higher than the deal price. They hope to cash in on a higher court-determined price plus default interest at five percent above the Federal Reserve discount rate, compounded quarterly.

Two recent Court of Chancery decisions authored by Vice Chancellor Sam Glasscock III — CKx, just affirmed by the Delaware Supreme Court, and In re Appraisal of Ancestry.com — may slow the momentum of appraisal arbitrage created by the court’s historic valuation methodologies in appraisal proceedings. Both of these appraisal cases held that the merger price was the most probative evidence of fair value. Without confidence that a premium could be secured through competing valuation testimony — through which experts have asserted a wide range of values — arbitrageurs may find the appraisal path significantly less inviting.