Chancery Court Confirms Beneficial Owner’s Standing to Pursue Appraisal Action
By David Bernstein and Meredith Laitner
Amid debates around the merits of “appraisal arbitrage,” the Chancery Court held in In re: Appraisal of Ancestry.com, Inc. that the hedge fund petitioner did not need to prove that the Ancestry.com shares of which it became the beneficial owner after the record date for voting on an Ancestry merger had not been voted in favor of the merger in order to pursue appraisal rights with regard to those shares. The Court said any problems with DGCL Section 262 itself should be solved by the legislature, not the courts.
On January 5, 2015, the Delaware Chancery Court issued its ruling in In re: Appraisal of Ancestry.com Inc., C.A. No. 8173-VCG (Del. Ch. January 5, 2015) (Glasscock, V.C.), finding that petitioner Merion Capital L.P., the beneficial owner of Ancestry.com, Inc. shares, did not need to prove that the specific Ancestry shares with respect to which petitioner seeks appraisal were not voted in favor of an Ancestry merger in order to have standing to seek appraisal.
Petitioner is a hedge fund that engages in “appraisal arbitrage” as part of its investment strategy; it purchased Ancestry shares after the record date for a 2012 acquisition of Ancestry.com, Inc. Merion’s Ancestry shares were held of record by Cede & Co. Merion caused Cede to submit a timely appraisal demand for the Ancestry shares beneficially owned by Merion and then, as is permitted by a 2007 amendment to Section 262(e) of the Delaware General Corporation Law, filed a petition for appraisal of the shares of which Merion was the beneficial owner. Merion could not determine whether the shares it had purchased had been voted in favor of the merger, but it was acknowledged that Cede had at least as many shares that were not voted in favor of the merger as the number of shares for which Merion sought appraisal.
Ancestry argued that, to have standing to invoke appraisal rights under Section 262 of the DGCL, Merion must demonstrate that the shares which Merion acquired had not been voted in favor of the merger by the persons who beneficially owned them on the record date. Vice Chancellor Glasscock rejected this argument, holding that it was sufficient for Merion to demonstrate that the number of shares held by Cede that were not voted in favor of the merger exceeded the number of shares for which Merion sought appraisal. With regard to the possibility that the total number of shares as to which beneficial owners seek appraisal might exceed the number of shares held by Cede that were not voted in favor of the merger, the Court said that issue was not before it, and that problems with Section 262 of the DGCL should be solved by the legislature, not the courts.
In re Appraisal of Ancestry.com Inc., C.A. No. 8173-VCG (Del. Ch. January 5, 2015) (Glasscock, V.C.)