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Delaware Shareholder Recovery Spotlight: Class Actions vs. Appraisal Rights
By: Michael Lange, Financial Recovery Technologies
Delaware remains a key jurisdiction for protecting investor interests, particularly through breach of fiduciary duty cases and appraisal rights matters. These legal mechanisms help investors seek compensation when merger payments do not reflect fair value, highlighting the importance of staying informed and vigilant about their investments.
This is an excerpt from NCPERS Spring 2025 issue of PERSist.
Delaware corporate law remains relevant to shareholders, particularly when merger payments do not fully reflect an issuer's fair value.
Delaware corporate law remains relevant to shareholders, particularly when merger payments do not fully reflect an issuer's fair value.
In December 2024, for example, a $1 billion settlement related to Dell Technologies' 2018 stock swap deal paid out to minority shareholders. Similar class actions involving Paramount Global ($122.5 million) and Patter Energy Group ($100 million) resulted in settlements last year. Shareholders have two primary legal mechanisms for seeking compensation in Delaware: breach of fiduciary duty cases and appraisal rights matters. Below, we explore their differences and the recovery implications.
High-Level Considerations
Breach of fiduciary duty cases:
- A specialized class action filed in Delaware Chancery court
- Investors are not required to submit proof of claim forms to receive compensation
- Those giving shares in the transaction are automatically eligible
- These cases are relatively common, with about 25-40 filings per year
Key challenge: While relatively efficient, the disbursement process can create headaches for client operations teams if they are not diligently monitoring the progression of these cases.
Appraisal rights opportunities:
- A representative proceeding focused on a Delaware merger's valuation
- Investors must affirmatively exercise their appraisal rights to participate
- Shares must be held through case resolution
- These actions are less frequent now, but still potentially significant for affected investors
Key challenge: Investors must carefully review any deal announcement by the issuer and determine whether to challenge the valuation before the appraisal rights deadline, which may be as soon as 20 days after final terms are given.
Breach of Fiduciary Duty Cases
Breach of fiduciary duty claims challenge the process by which a merger agreement came together, alleging that one or multiple parties failed to act in shareholders' best interests, and that they received too little consideration as a result.
Procedurally, these cases mirror standard U.S. securities class actions filed in federal court, meaning all eligible claims are automatically included (unless they opt out). However, unlike federal proceedings, Delaware's class action settlements are distributed to those who previously tendered their shares, eliminating the need for them to provide proof of claim forms. Investors holding eligible securities when the transaction is effective and shares are tendered are automatically included in the class, with settlements distributed pro rata based on individual holdings at the time.
Settlement administrators directly credit the shareholders of record, with custodians holding shares in street name and allocating funds to the actual beneficial owners. While this approach reduces the administrative cost and burden otherwise borne by investors in most class actions, the custodians vary in the form and timing of their notification and remittance procedures. This can lead to unexpected distributions for custodial clients who are not diligently monitoring these cases and do not know the money is coming – particularly if they must further remit funds to their own customers.
Appraisal Rights Opportunities
Appraisal opportunities are a more selective legal mechanism for shareholders seeking additional value in a Delaware-based transaction. To be eligible for an appraisal action, investors must give notice that they intend to exercise their rights and then hold their shares through the conclusion of proceedings.
Importantly, appraisal opportunities do not allege wrongdoing related to deal conception and construction. Rather, they focus on an investor's right to a fair, objective determination of the value of your investment. Both investors and the transacting parties bear equal burden to demonstrate “fair value” through the evidence.
While both fiduciary duty and appraisal claims involve disputes over the sufficiency of deal consideration, that value is measured at different times. For class actions, the value is determined when the deal is struck. Subsequent price movements do not impact class claims. For appraisal, it's measured at deal closing. Thus, price increases between deal conception and closing can strengthen appraisal claims, while price declines can weaken them.
Like class actions, appraisal proceedings are pursued by a representative shareholder. However, because appraisal rights must be actively exercised, only those that do so are included. This is similar to the opt-in approach to group litigation we often see outside the U.S.
When another investor initiates and successfully prosecutes the appraisal petition, shareholders that have exercised their appraisal rights can share in any premium resulting from those efforts, which are then decided either by the court or through direct negotiations.
Conclusion
As Delaware shareholder recovery evolves, a set of timeless principles still applies for investors and fiduciaries navigating this important venue: stay vigilant, stay informed, and consult experts as necessary.
Bio: Michael Lange, SVP Worldwide Litigation, is a licensed attorney since 1991, Mike Lange has deep working knowledge of securities litigation, a rich network of relationships in the U.S. and abroad with lawyers, case organizers, and other players in the recovery space – all of which he leverages to help institutional investors and funds make more informed filing decisions.
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