“When Dole Food Co. sold itself last year to its founder for $1.2 billion, many market watchers saw just another in a string of buyouts.
A few investors saw an opportunity to squeeze the buyers for potentially millions of dollars more, using an arcane—but increasingly popular—legal process known as appraisal.
Merion Capital LP bought 7.5 million shares of the fruit company in the days before Dole’s October stockholder meeting. It rejected the $13.50-a-share deal price and, alongside three other hedge funds, is seeking more in court through appraisal.
Dole’s buyout highlights the rise of “appraisal arbitrage,” in which hedge funds buy shares of companies on the brink of a buyout and ask a judge to award them a higher price. These lawsuits have risen sharply as a growing group of investors looks to extract more money from corporate takeovers.
Some have won big, but risks lurk in the strategy’s popularity, industry participants say. As more investors chase appraisals, they risk toppling the very deals on which they are trying to profit. That is because appraisal-seekers must abstain or vote “no” on a deal. Dole’s buyout passed with just 50.9% of the vote after the four hedge funds, holding 17 million shares, positioned themselves for an appraisal claim. The litigation is pending.
“People are waking up to the idea that there is a lot of money to be made,” said Kevin Abrams, a lawyer who has worked on both sides of these cases. “But it’s not for the faint of heart. There are risks at every step.”
Above, a picker for Dole Foods, which was the subject of an appraisal. Bloomberg News
In an appraisal case, dissenting stockholders ask a judge to determine the fair value of their shares after a deal closes. The judge weighs expert valuations and decides on a number, which is binding on the company and shareholders.
Appraisal claims were brought on 17% of takeovers of Delaware companies in 2013, the most since at least 2004, according to a coming study from Brooklyn Law School and Case Western Reserve University. Based on deal prices, those claims were valued at $1.5 billion, an eightfold increase from 2012.
So far this year, at least 20 appraisal claims have been filed in Delaware court, compared with 28 in all of 2013, according to a Wall Street Journal review of court filings.
About 81% of Delaware appraisals that went to trial since 1993 have yielded higher prices, according to law firm Fish & Richardson PC, which has represented shareholders in appraisals. In an extreme case, a judge in 2004 awarded dissenting stockholders of Coleman Co. $32.35 a share, five years after the company was sold for $5.83 a share.
Shareholders also get backdated interest on their claims, whether they win or not; the current rate is about 5.75% annually.
The risk of a big payout prompts many companies to settle with the shareholders seeking appraisal. “Having to come back and pay 10 million shares three times the deal price isn’t a very attractive option, especially for a company that’s taken on debt in the deal,” said Carl Sanchez of law firm Paul Hastings LLP.
Settlement amounts vary and are confidential, but lawyers and investors say double-digit per-share price bumps are common.
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