Private equity firm Silver Lake has sued billionaire Carl Icahn and dozens of hedge funds in Delaware, seeking to prevent investors from using a specialized legal strategy to pursue potentially hundreds of millions of dollars from its $13 billion acquisition of Endeavor Group.
Silver Lake Technology Management filed the lawsuit Monday in Delaware’s Court of Chancery, asking the court to declare that hedge funds cannot pursue appraisal claims for Endeavor shares they bought after Silver Lake announced its plan to take the entertainment company private in 2024 for $27.50 a share.
The case highlights an unusual feature of Delaware corporate law that has become increasingly important to investors pursuing merger-related returns. Under the state’s appraisal statute, shareholders who believe a merger price is below the fair value of their shares can ask a court to determine what the stock was actually worth at the time of the transaction.
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Unlike a class action, an appraisal proceeding applies only to the shares held by the investors bringing the claim. After reviewing valuation evidence from both sides, a judge can determine a fair value that is higher or lower than the merger price. The stakes could be substantial for Silver Lake. A ruling allowing the hedge funds to pursue appraisal could expose the private equity firm to claims potentially worth hundreds of millions of dollars or more.
Hedge Funds Targeted Endeavor After Deal Announcement
Endeavor became an attractive target for funds pursuing a strategy known as appraisal arbitrage. The investment strategy involves acquiring shares in companies involved in announced mergers and then seeking a court-determined valuation if investors believe the agreed takeover price is below the company’s fair value.
In Endeavor’s case, the potential value of its remaining assets became more apparent after the acquisition was announced. Endeavor owned a majority stake in TKO Group Holdings, whose assets include World Wrestling Entertainment and Ultimate Fighting Championship.
TKO’s shares rose sharply after the Endeavor transaction was announced, according to Silver Lake’s lawsuit. Appraisal-focused hedge funds subsequently bought Endeavor shares, in some cases paying more than the $27.50 merger price, the lawsuit alleges.
Silver Lake argues that the funds were not genuine shareholders objecting to the transaction but investors seeking to profit from the appraisal process.
“They are not dissenters; they are opportunistic arbitrageurs,” Silver Lake said in the lawsuit.
The legal argument faces a heavy obstacle. Delaware’s Court of Chancery has previously ruled that investors who purchase shares after a merger has been announced can still have the right to bring appraisal claims. That precedent could make the dispute less about whether the hedge funds bought their shares after the transaction was announced and more about whether the circumstances surrounding those purchases allow them to pursue appraisal in this particular case.
Icahn Faces Separate Lawsuit
Icahn is not an appraisal claimant in the case. He has instead filed a separate class-action lawsuit alleging that Endeavor’s management and Silver Lake breached their fiduciary duties to shareholders and structured the transaction to benefit insiders.
Silver Lake has accused Icahn of coordinating with appraisal-focused hedge funds to acquire Endeavor shares, an allegation that Icahn and the funds have denied. The private equity firm has also accused some of the hedge funds of failing to make appropriate securities disclosures related to their Endeavor purchases.
The overlapping lawsuits add another layer to the legal dispute surrounding the transaction. While the appraisal cases focus on whether shareholders received fair value for their shares, Icahn’s lawsuit raises broader questions about the conduct of Endeavor’s management and Silver Lake in negotiating and executing the deal.
Delaware Law Is Changing The Litigation Landscape
The dispute comes as Delaware’s corporate litigation environment is undergoing significant changes.
Last year, Delaware lawmakers amended the state’s corporate law to make it more difficult to bring certain lawsuits involving transactions with large or controlling shareholders. The changes also made it harder for investors to obtain corporate documents when investigating potential conflicts of interest.
Delaware lawyers say appraisal litigation has increased since those changes.
One possible explanation is that investors believe more transactions are being completed at prices below their assessment of fair value. Another is that traditional fiduciary-duty lawsuits have become more difficult to pursue, making appraisal proceedings a more attractive alternative.
Appraisal cases can also provide investors with a route to obtain confidential corporate documents that may otherwise be difficult to access. That makes the Silver Lake lawsuit part of a broader debate over the role of appraisal rights in Delaware’s corporate system. The mechanism was designed to protect shareholders who object to merger prices, but private equity firms and other acquirers have increasingly faced sophisticated investors using the process as part of merger-arbitrage strategies.
The Endeavor dispute could therefore have implications beyond the $13 billion transaction. A ruling addressing whether funds that purchased shares after a merger announcement can pursue appraisal, and under what circumstances, could affect how investors approach future Delaware takeovers.
For Silver Lake, the immediate objective is to limit the potential cost of the Endeavor acquisition, while the case is to determine whether the hedge funds can continue pursuing a court-determined valuation after purchasing shares in the period between the announcement and completion of a merger.
The competing lawsuits involving Silver Lake, Icahn, and the appraisal investors now place the economics of the Endeavor deal before Delaware’s corporate court, with potentially significant consequences for how merger appraisal rights are used in future transactions.