The strategy does come with risks. Judges have ruled the fair price was below the deal price in a small number of cases, and the hedge funds have to pay for their lawyers and experts.
The appraisal strategy has been pioneered in recent years by Merion Capital LP, a hedge fund founded by Andrew Barroway. The former securities class action lawyer got his start building Schiffrin & Barroway, now known as Kessler Topaz Meltzer & Check, into a major player in federal securities fraud class actions.
Appraisal rights are not new. They originally emerged as protection for minority investors as companies did away with universal shareholder approval for certain corporate events.
Seeking an appraisal of a deal had previously mainly been used by minority investors who felt they were squeezed out of a deal decision by a controlling shareholder. However, in recent years the claims have often come from hedge funds seeking juicy returns.
In a handful of cases in the past few years Delaware judges have determined the fair price was much higher than the deal price. In the sale of entertainment company The Orchard Enterprises, a Delaware judge found the fair price was 127.8 percent above the takeover price, according to a client memo from Fried Frank. The interest during the two-year case tacked on another 36.1 percent to returns.
The proposal by the Delaware bar comes at a time when the state's lawyers are seeking to preserve the state's leading role in corporate litigation while responding to business demands to cut meritless shareholder lawsuits.
More controversial proposals for changing Delaware corporate law will be considered next month by the state's corporate lawyers. Some are designed to prevent companies from adopting bylaws that force their legal costs onto shareholders who sue and lose.
The committee proposing the appraisal arbitrage amendment is reflective of many types of corporate law specialists, including those who represent investors as well as lawyers for companies they sue.
Some lawyers outside Delaware who represent companies have criticized the appraisal proposal for not being tough enough on the hedge funds.
Trevor Norwitz, a top deal lawyer at Wachtell, Lipton, Rosen & Katz, which advised PetSmart, said Delaware law should require that only investors who were shareholders before the deal announcement be allowed to seek appraisal. Many funds seeking appraisal rulings scoop up their stock after the shareholder vote on the deal but just before it closes, which is a constant irritant to the company defense lawyers who want proof of how the shares held by the hedge funds were voted on the deal.