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A Delaware court ruling has complicated an increasingly popular hedge fund strategy that seeks to profit from challenging the valuation of companies following agreed takeovers, according to Bloomberg Law.
Appraisal arbitrage has enjoyed a revival following changes to Delaware corporate law last year that made some conventional shareholder lawsuits more difficult. The strategy typically involves hedge funds buying shares after a takeover is announced and then asking the Delaware Court of Chancery to determine whether investors should receive a higher price.
AQR Capital Management, Elliott Investment Management and other institutional investors have been among firms pursuing appraisal claims as activity in the strategy has increased.
Skechers tactic rejected
The latest development centres on 3G Capital’s $9.4bn acquisition of Skechers, where investors have challenged the valuation through appraisal proceedings.
Some hedge funds involved in the appraisal case also sought to lead a separate shareholder class action, potentially allowing evidence obtained through the appraisal process to support claims that the deal was conflicted and underpriced.
Vice Chancellor Lori Will rejected their leadership bid, Bloomberg Law reported, identifying potential conflicts arising from simultaneously pursuing appraisal and class-action proceedings. The judge also highlighted that the funds had acquired their shares after the takeover was announced.
The ruling does not prevent hedge funds from pursuing appraisal arbitrage. Instead, it challenges the emerging tactic of combining an appraisal claim with a broader shareholder lawsuit to increase legal leverage.