A growing number of hedge funds – including Elliott Investment Management, Man Group and an AQR Capital Management affiliate – are returning to appraisal arbitrage, a strategy that challenges M&A deal prices in Delaware’s Chancery Court in pursuit of higher valuations, according to a report by Bloomberg.
Appraisal arbitrage, which involves buying shares after a deal is announced and then seeking a court-determined fair value, fell out of favour following a series of rulings that upheld or discounted deal prices. But the strategy is resurfacing as funds target a small number of high-value, controller-led takeovers, with the aggregate size of contested shares now among the largest ever seen in Delaware.
In Silver Lake’s $25bn take-private of Endeavor Group, investors are seeking appraisal on $4.1bn worth of stock. A further $1.3bn – including roughly $400m held by Elliott – is being challenged in 3G Capital’s $9.4bn buyout of Skechers. Plaintiffs argue both deals benefited controlling shareholders and disadvantaged minority investors.
The resurgence comes despite Delaware’s recent overhaul of shareholder litigation – changes that made derivative and class-action suits harder for small investors but do not apply to appraisal claims. As a result, more deep-pocketed hedge funds are taking the lead.
Funds are concentrating on more selective situations, typically involving conflicts or perceived weaknesses in deal processes. In Skechers, the Greenberg family, which controlled 60% of the vote, approved the buyout without minority shareholder approval. In Endeavor, Silver Lake owned 37% and belonged to the controlling group that pushed through the take-private.
Other firms are considering similar challenges. JPMorgan’s Highbridge Capital made a $69.2m appraisal demand in Centerbridge Partners’ take-private of MeridianLink, while AQR Arbitrage is weighing action against Thoma Bravo’s acquisition of Olo.
Appraisal claims surged a decade ago as funds earned interest at 5% above the federal discount rate while cases proceeded, prompting Delaware to allow companies to prepay petitioners in 2016. Volumes later collapsed following several headline losses, including rulings against investors in the Dell and Clearwire deals.
But confidence has been buoyed by a 2024 decision in which Chancellor Kathaleen McCormick awarded above-deal value in a challenge to VMware parent Dell Technologies’ acquisition of Pivotal Software — reviving interest in controller-led transactions that plaintiffs’ lawyers now view as lower risk.
