Alpha Financial Experts K. K.

Appraisal Litigation in Japanese and Delaware Courts Trends of Decisions on the Fair Price
A Common Trend of Placing Weight on the Merger Price is Observed
While Differences Remain on How to Assess the Fair Procedure

July 20, 2020

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Executive Summary
Like Delaware and other U.S. State laws, Japan's Company Act
provides shareholders opposing the reorganization the right to request
the company to purchase shares at a "fair price", and if the negotiation
cannot be concluded within a certain period of time, the opposing
shareholders can request the court to determine the fair price. In thispaper, we first compare the trends in the number of cases filed inJapan and Delaware, and then analyzed the trend of (1) the premium of
the court decision price over the “merger price” (or a price agreed
between the parties during transaction), (2) the approaches deciding
the fair price, and (3) the total amount of award using our database ofdecisions by Japanese and Delaware courts up to 2019. Based on theseanalyses, we observed a trend that both Japanese and Delaware courts
have recently placed more weight on the merger price, which isbelieved to have accelerated the declining trend in number of cases
and the level of premiums in the two jurisdictions. In Japan, thistendency is considered to be greatly influenced by the Supreme Court'sdecision in Jupiter Telecom1 that the merger price should be adopted
as a fair price if there are generally accepted fair procedures. However,
we will discuss at the end of this paper whether this trend willcontinue in the future and a few important issues around verifying thefairness in procedure, including how the third-party valuation isprepared and discussed during the procedure.

1.

Trends in number of filingJapanese courts do not regularly publish statistics of filing or judgment,
but according to Okamoto (2019)2, the number of new cases ofpetitions for stock price determination accepted by the Tokyo District
Court, including cases other than the stock purchase request, has been
at a level of 40 or more per year since FY2009, except for FY2016. The
number of new cases was particularly high at around 70 in FY2009
and FY2013. The cases in FY2016 and thereafter include the so-called
two-stage cash-out cases under the new procedure established by therevised Companies Act in 2014, where if 90% or more of the voting
rights of all shareholders are obtained by the tender offer the buyer, or“special controlling shareholder”, can request the remaining
shareholders to sell out shares, and if the ratio is less than 90%, the1The Supreme Court decision, July 1, 2016, Kinsho 1507, 19p
Yohei Okamoto “Overview of Commercial Cases in the Tokyo District Court”, Shojihomu No.
2209, pages 28-4422Copyright ©2020 Alpha Financial Experts K.K., All Rights Reserved.

ordinary share consolidation procedure is used to acquire allremaining shares.
Figure 1: The number of new cases of petitions for stock pricedetermination accepted by the Tokyo District Court

Statistics from Okamoto (2019）as of FY2019, Alpha Financial Experts

Figure 2: The number of appraisal petitions filed in the Delaware
Court of Chancery

Partial excerpt from Cornerstone Research “Appraisal Litigation in Delaware:
Trends in Petitions and Opinions 2006-2018”, p4

On the other hand, the Figure 2 shows the trend in the number ofappraisal petitions filed in the Delaware Court of Chancery from 2006
to 2018, an excerpt from the Cornerstone Research study. According tothis statistics, it is clear that the number of cases has continued toincrease from around 2009, peaking in 2016 (76 cases), and thenrapidly decreasing during the two years of 2017 and 2018.

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The use of the appraisal arbitrage by hedge funds or private equity
funds is believed to be the reason behind the rapid increase in thenumber of complaints up to 20163. The appraisal arbitrage is aninvestment method to purchase shares after the resolution of thegeneral meeting of shareholders related to the merger, expecting thatthe court awards a price higher than the purchase price plus statutory
interest rates of fed funds rate plus 5%. The investors using thismethod exercise the opposing shareholders’ right to demand thebuyback of shares at fair price and invite other investors to exercise
the same. These funds tend to select reorganization deals wherecontrolling shareholders have incentives to keep prices low and theconsideration for minority shareholders merger price is believed to be
too low.4 On the other hand, the decrease in the number of filing after
2017 is explained by the general decline of price premium over themerger price, as discussed below, with which the appraisal arbitrage
method became economical unfeasible.

2. The premium over the merger priceRegardless of presence of the appraisal arbitrage, the trend in thenumber of filings of appraisal petitions depends on whether a pricehigher than the merger price can be expected in the appraisal litigation.
We studied 56 appraisal litigation cases5 in Japan since 2007 wherethe decision was made public and by excluding 13 cases in which
necessary data were not available, we created the pool of 43 cases forfurther study on the premium, not including statutory interest rates, ofthe decision price per share6 over the merger price (in many cases
means the tender offer price). Figure 3 provides a time-series
distribution of the premium in Japan.
According to this analysis, there has been a number of positive
premium cases in Japan, with 14 out of the 43 cases having a positive
premium, but 28 cases having a zero premium. The premium wasnegative in one case. As a result, the average premium is only 3.8%.
Until around 2013, the price was relatively high compared to the3Cornerstone Research, “Appraisal Litigation in Delaware: Trends in Petitions and Opinions
2006-2018”, p5
4
Andrew Barroway, founder and CEO of Merle Investment Management, said in the Wall Street
Journal on April 13, 2014 that most deals were fair and the company had at least 30 deals. Itstates that it targets exceptional cases (especially MBO cases) that are undervalued by more than30%.
5The original court case and the appeal case are treated separately when the separate decisions
are available.
6Premium = (court decision price ÷ Merger price)-1

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merger price, and there were cases where the premium was around50%, but in recent years, it has been almost zero, that is, the court hasadopted the merger price as a fair price.
Similarly, we studied 34 Delaware court cases that reached decisions
after trial in the period from 2010 to 20197. Unlike Japan, Delaware
court cases are mostly settled or withdrawn before or in the middle ofthe trial, resulting relatively fewer number of decisions for study
despite large number of filings. Of the above 34 decisions, we selected
32 in view of data availability and conducted an analysis of the pricepremium, not including the statutory interest rate, over the merger
price as shown in Figure 4. Of the total 32 cases, 14 cases, or 44%, had
positive premiums, with a maximum of 158%. The average value is
16.7%, indicating that a higher price than the merger price is tend tobe awarded as a fair price in Delaware compared to Japan. However,from a time-series point of view, as in Japan, the number of zeropremium cases has increased in recent years, and several negative
premium cases have been observed in Delaware. This provides a
background of recent decrease in the number of filings that may berelated to the declined feasibility of appraisal arbitrage.
Figure 3: Premium of court decision price over the merger price(Japan)Alpha Financial Experts

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The original trial and the appeal trial are treated separately if the separate decisions areavailable.

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Figure 4: Premium of court decision price over the merger price(Delaware)

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3. Trends in valuation approach
There are also similar trends in Japan and Delaware with regard to thetype of valuation method used as a base for determining the fair price.
Figure 5 summarizes the number of cases for each of the above 54
cases in Japan by the main method for deriving the result adopted bythe court as a fair price. According to this statistics, Japan had manydecisions based on the unaffected market price, or a method relying on
the market share price unaffected by the information of merger orreorganization, until around 2015, but the adoption of the merger
price has been dominant since then. Decisions based on other methods
such as the DCF method are very limited. This tendency is inextricably
linked with the increasing number of zero premium cases in recentyears, as seen in Figure 3, that became apparent since the Supreme
Court decision in the Jupiter Telecom in July 2016 in which the courtplaced greater importance on the merger price over other methods
compared to the previous court decisions.
Figure 6 shows a similar analysis for the Delaware cases. Compared toJapanese courts, Delaware courts often adopts the DCF method, but inrecent years, as in Japan, the tendency to adopt merger prices has
become more apparent, particularly after the Supreme Court decisions
in Dell8 and DFC Global9 in 2017, which provided a guidance
regarding the conditions courts can accept the merger price as a basis
896Dell, Inc. V. Magnetar Global Event Driven Master Fund Ltd. (Del. Dec. 14, 2017)
DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A. 3d 346 (Del. 2017)

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for the fair price. According to the Court of Chancery decision in AOL10,
the essence of this guidance is that if the merger price “represents anunhindered, informed, and competitive market valuation” and“(w)here information necessary for participants in the market to makea bid is widely disseminated, and where the terms of the transaction
are not structurally prohibitive or unduly limiting to such market
participation”, the trial judge must give particular and serious
consideration to the merger price.
It is also noteworthy that since 2018 we have seen a few cases in
Delaware adopting unaffected market price as a base for the fair price.
Delaware courts had historically distrusted the market price, but inAruba decision11 in 2018, though later denied by the Supreme Court,
the Court of Chancery decided that the fair price should be based on
the unaffected market share price for the first time in recent years.
Preceding Supreme Court decisions in Dell 12and DFC Global13
provided the basis for the above Aruba decision since the two decisions
admitted the superiority of the market price under certain conditions
based on the efficient market hypothesis.
Figure 5: Main evaluation approach adopted by courts (Japan)

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In re Appraisal of AOL Inc., C.A. No. 11204-VCG (Del. Ch. Feb. 23, 2018)
Verition Partners Master Fund Ltd. v. Aruba Networks Inc., C.A. 11448-VCL (Del. Ch. Feb. 15,2018)12
Dell, Inc. V. Magnetar Global Event Driven Master Fund Ltd. (Del. Dec. 14, 2017)13
DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A. 3d 346 (Del. 2017)11

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Figure 6: Main evaluation approach adopted by courts (Delaware)

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4. Comparison of total award amount
Next, in order to compare the level of monetary amount disputed in
the appraisal litigation in Japan and the U.S., we have studied 46, outof above 54, cases in Japan where data were available and 25, out ofabove 34, cases in Delaware. Figure 7 compares the distribution of thetotal award amount, that is, the amount determined by multiplying thenumber of claimed shares by the decision price. For comparison, theexchange rate of 1 dollar = 110 yen was applied. According to thisanalysis, most cases in Japan award less than 100,000 dollars, whilemost cases in Delaware award more than 10 million dollars. The
median value in Japan was 391,000 dollars, while the median value inDelaware was 43,705,000 dollars. In Japan, the highest amount wasawarded in the Rakuten v. TBS14 at about 445 million dollars and in
Delaware the highest amount case was Merion Capital, LP et al., v. 3MCogent, Inc.15 at about $963 million.

14158The Tokyo District Court Decision, March 5, 2010, Kinsho 1339, p. 44
Merion Capital, LP et al., v. 3M Cogent, Inc., CA 6247-VCP (Del. Ch. 2013)

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Figure 7:
DelawareComparison of total award amount in Japan andAlpha Financial Experts

5. Future outlook
As we have seen above, there is a common trend in recent years ofplacing weight on the merger price in appraisal litigation both in Japanand Delaware courts. This trend has been supported by the Supreme
Court decisions in the both jurisdictions, namely the Jupiter Telecom
decision in Japan and the Dell and DFC Global decisions in Delaware,
which made clear the idea that the price agreed between the parties isacceptable as the fair price if the process leading to the transaction isgenerally regarded as fair.
On the other hand, there are some differences between court decisions
in Japan and Delaware. The Jupiter Telecom decision in Japan did notnecessarily provide details as to how to assess “the generally accepted
fair procedure" that the Supreme Court specifically referred to. The
succeeding decisions has not yet fully answered the question. For
example, in multiple recent cases the court admitted the fair procedure
simply because the tender offer price is within the range provided by
the third-party valuation firm16. With these as a background, there is a
simplified understanding that valuation topic is no longer important aslong as the formality such as the independent committee and thethird-party valuation firm is in place for the court to admit the“generally acceptable fair procedure”.
On the other hand, the Delaware Supreme Court decision in Golden
16

The Osaka District Court Decision Heisei 29 January 18, 2016 Kinsho 1520, page 56, Shizuoka
Chi decision October 7, 2016 Westlaw Japan, etc.

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Telecom ruled that “(r)equiring the Court of Chancery todefer—conclusively or presumptively—to the merger price, even in theface of a pristine, unchallenged transactional process, wouldcontravene the unambiguous language of the statute and the reasoned
holdings of our precedent” and that it would inappropriately shift theresponsibility to determine “fair value” from the court to the private
parties17. Succeeding court decisions including those in Dell and theDFC Global follow this principle and rigorously examine the sales
process and valuation methodologies even if merger price is finallyadopted as the fair price.
In June 2019, Japan’s Ministry of Economy, Trade and Industry
published “Fair M&A Guidelines” that intends to present fundamental
ideals and practical measures based on these ideals to ensure fairness
in M&A deals18. We believe that Japanese courts and parties will use
this guideline in future when they verify if the sales process is truly
fair beyond its formality. If so there will be more substantive
discussions about the price formation processes and more vibrantdebate about the valuation approaches and results, leading to morediversified decisions on the fair value.
End1718

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Golden Telecom, Inc. v. Global GT LP, 11 A.3d at 217.
https://www.meti.go.jp/english/press/2019/0628_004.html

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About the Author
Makoto Ikeya, Managing Director, Alpha Financial Experts K. K.
As economic expert in litigation, Ikeya has provided expert witness and consulting services
in domestic and international litigation and arbitration on matters of commerce, securities
and finance, anti-trust, intellectual property, and tax. He has also provided advisory andconsulting services on matters related to antitrust, international trade, transfer pricing,
M&A, etc. Ikeya previously served as Managing Director at Deloitte Tohmatsu Financial
Advisory LLC’s Valuation, Modeling, and Economics department. He also served as ExecutiveDirector at AlixPartners and Vice President at NERA Economic Consulting. lkeya holds aMaster of International Affairs, with a concentration in international finance and business,from Columbia University, and BA in economics from Sophia University, Japan.
Please direct any questions or comments to Makoto Ikeya at mikeya@alphafinex.com or81-80-3511-7505.

About Alpha Financial Experts K. K.
Alpha Financial Experts is uniquely positioned as Japan’s premier professional firm led byhighly experienced and independent experts who place value on their professional integrity.
We aim at assisting clients and parties through our services to respond to domestic andinternational dispute, regulatory matters, and issues with stakeholders, etc. where theeconomic fairness highly matters.

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