If you represent a Delaware shareholder, be careful what you wish for when seeking post-acquisition appraisal. You will receive what the court determines to be the fair value of your shares irrespective of the actual merger consideration.
Former shareholders and managers of a prison healthcare detention company recently sought appraisal of their shares by the Delaware Chancery Court following a $40 million acquisition of the company. Gearreald v. Just Care, Inc., No.5233-VCP, 2012 WL 1569818 (Del. Ch. Apr. 30, 2012). Unfortunately for the dissenting shareholders pursuing appraisal, the court found the fair value of the company to be only $34 million.
Immediately following the acquisition, $6 million of the $40 million merger consideration was placed in an escrow account to cover any claims brought against the company in the upcoming years, including claims for appraisal such as this.
Therefore, if the dissenting shareholders would have been able to prove the fair value of the company was over $40 million at the time of the merger, they would have been entitled to additional consideration in an amount equal to the difference between the fair value of the company and $40 million (up to the $6 million in escrow).
This proved not to be the case here, however. Since the court found the fair value of the company to be only $34 million, the result is that the dissenting shareholders received less consideration then they would have had they not sought appraisal.
On top of that, the consenting shareholders reaped the benefits of this decision, as they received their original pro rata share of the merger consideration plus a share of the excess consideration
forfeited by the dissenting shareholders as consequence of seeking appraisal.
This could also happen under the Model Business Corporation Act, adopted by Iowa. Dissenting shareholders are entitle to payment of the fair value of their shares by the corporation once the shareholders have perfected their dissenters rights. Although likely to be the same as the merger consideration, and certainly not more, it doesn't have to be (see the definition of "fair value" in Iowa Code Section 490.1301). And court could confirm this amount.
-Marc Ward (aided by summer associate, Margret White)