Lisa Bei Li

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Appraisal arbitrage is on the rise. Institutional investors—namely, hedge funds—buy into target companies after their merger announcements and bet on the price. By purposely taking a minority position, these funds proceed to courts to obtain what they otherwise could not in the market: a “fair value.” Where there is no allegation of wrongdoing or injury, these plaintiffs nonetheless successfully divert deal value away from business combinations. Based on a misunderstood statute, appraisal arbitrage has exploded into a multi-billion dollar industry for large fund investors. In June 2016, amid growing concerns, the Delaware General Assembly amended section 262, Delaware’s appraisal statute. While the effort is a start, it can by no means be an end. Although the debate on appraisal arbitrage is largely one of policy, Delaware’s greatest predicament is its conflicting jurisprudence. There exists a corporate governance overlay between the state’s common law and section 262, which is now being used by arbitrageurs for fiduciary duty issues. While Delaware’s judiciary has decisively constructed its fiduciary duty doctrine, section 262 has stayed in limbo—unclarified by the legislature and unadjusted by the court. As a result, the statute’s current use conflicts with established fiduciary duty standards. This Note examines the development of this conflict. It calls for unification of the two competing areas of law, which would naturally fit under an entire fairness test, if implemented. This Note argues that such implementation follows from the principles of Delaware lawmaking and its deference to judicial expertise. As an example, this Note recommends a simple, but meaningful proposal, after which the General Assembly can model future changes. By adopting such a proposal, Delaware can effectively curb unintended developments like the incredible practice of appraisal arbitrage.

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