Proposed bill aims to balance shareholder rights; judicial resources
A proposed change to Delaware's corporate statutes is generating controversy with some charging the bill would save judicial resources at the expense of plaintiffs' rights.
House Bill 371 would restrict the number of corporate shareholders who can petition the court for a stock appraisal to only those who own $1 million or more of a company's stock or 1 percent of the outstanding shares, depending on which is less. Currently, any shareholder can ask the court to appraise their shares. Those motions are typically filed when a company is the target of an all-cash acquisition and the shareholder wants to ensure the buyer is paying a fair price for the stock.
Hedge funds have been taking advantage of the appraisal tool in recent years. The funds typically purchase stock in a company before it is about to be sold and then file an appraisal motion with the Delaware Court of Chancery in an effort to squeeze more money out of the deal. Such cases are expensive because they require a horde of financial experts and often tax judicial resources.
A study published earlier this month by four noted corporate law professors, including Wei Jang of Columbia Business School and Randall S. Thomas of Vanderbilt Law School, found that hedge funds have accounted for nearly 75 percent of the amount awarded in all appraisal actions over the last few years. The study also found that 32 percent of the cases involved stakes below $1 million or 1 percent of a company's stock.
Supporters of the bill, sponsored by State. Rep. Melanie George Smith, argue that eliminating more than a quarter of these cases would reduce the burden Delaware taxpayers pay for the judiciary's resources. Smith was unavailable for comment.
"These cases are expensive and there are plaintiffs' attorneys who have made a business out of bringing these cases based on owning a couple hundred shares," said Lawrence A. Hamermersh, a professor of corporate law at Delaware Law School. "That's an abuse."
Others argue the bill unfairly penalizes small stockholders who have an equal right to have their claims heard by the Chancery Court. In an op-ed in The New York Times, Steven Davidoff Solomon, a corporate law professor at the University of California Berkeley School of Law, said the proposal could knock out small shareholders, not the hedge funds who are filing most of the actions.
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Charles Elson, a professor of corporate governance at the University of Delaware, said he understands the argument on both sides.
"Anytime you attempt to restrict the rights of a smaller shareholder, it is going to be controversial whether or not the approach is warranted," he said.
Similar legislation was proposed last year, but it was tabled after critics raised similar arguments. The current bill passed in the house earlier this month without dissent and was approved by the Senate Judicial Committee on May 18. A full Senate vote and approval by Gov. Jack Markell are the last steps before it becomes law.
Minor Myers teaches appraisal and corporate law at Brooklyn Law School. He called the legislation, "a good idea."
"If no one out there is willing to put down $1 million, maybe it is not a claim that justifies expensive lawyers and scarce judicial resources," he said.
Myers said smaller stockholders can find ways to participate in the larger appraisal cases, which are the ones that typically generate the most benefit to stock owners. He said smaller stockholder actions rarely see returns on a par with larger-scale litigation and such cases cannot be dismissed at the preliminary stage, requiring the court to pay for an expensive trial.
"There is no procedural motion to get rid of appraisal cases and the policy benefits of the tiny appraisal case are very small," he said.
Contact Jeff Mordock at (302) 324-2786, on Twitter @JeffMordockTNJ or jmordock@delawareonline.com.