Kelly Weighs in on Recent Appraisal Arbitrage Developments in Delaware

Agenda, a Financial Times publication, quoted partner Chris Kelly in its recent article "New Rulings Clarify Chancery Court Stance on Valuation." The article discusses two recent rulings from the Delaware Court of Chancery, In re Appraisal of PetSmart, Inc., and In re Appraisal of SWS Partners. These two rulings illustrate when the court will defer to the deal price determined by a corporate board in stockholder lawsuits that argue the deal price was unfair, also known as appraisal arbitrage.

“The market really is the primary and best way to value a company, assuming it's an arm's-length transaction, and I think the PetSmart decision indicated the court has a preference of deferring to the merger price if the sales process is reasonable, regardless of other alternative valuation techniques,” Kelly said. “The case shows that the court will likely side with the board's determination of the company's value if the sales process was robust and overseen at arm's length.  

Kelly noted that "creating meaningful pre-signing competition or credible threat of competition, a mixture of strategic and financial buyers, and then not shutting out or favoring any particular bidder is important."

Kelly further said "the PetSmart case makes the calculus behind appraisal arbitrage-driven investments riskier for hedge funds, which may discourage more frivolous cases."

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