Appraisal Rights and Appraisal Arbitrage

When a merger is approved, shareholders normally just accept the deal price and move on. Appraisal rights, granted under statutes like Delaware's Section 262, give a dissenting shareholder a different option: refuse the merger consideration and instead petition a court to determine the "fair value" of their shares independently. If the court finds fair value is higher than the deal price, the dissenter gets paid that higher amount, plus statutory interest for the time the case takes.

Worked example. A target agrees to be acquired at $40 per share. A specialist fund believes the company's true value is closer to $48, based on discounted cash flows the board allegedly underweighted during negotiations. Instead of tendering into the deal, the fund buys shares after the merger is announced, formally dissents before the shareholder vote, and files for appraisal. If the Delaware Court of Chancery later determines fair value was $45, the fund receives $45 per share plus interest — a gain over the deal price, though smaller than hoped, and only after a legal process that can take one to three years.

The strategy carries real risk: courts sometimes find fair value is at or below the deal price, meaning the dissenter earns less than shareholders who simply accepted the merger consideration up front. Appraisal petitions also tie up capital for years awaiting a ruling, and Delaware has narrowed the practice over time by allowing companies to prepay dissenters and stop the interest clock, reducing the reward relative to the wait.