Hedge funds lead charge against buyouts

Hedge funds are increasingly using a rarely deployed legal tool to challenge large take-private transactions. Carl Icahn's firm, Glazer Capital and Empyrean Capital Partners are among investors spearheading proposed class actions contesting multibillion-dollar buyouts of public firms, seeking to fill a role traditionally played by individual shareholders and pension plans that sue after being cashed out by private equity buyers at prices they consider too low. The cases are unfolding in Delaware, whose business court was overhauled last year to loosen deal-approval standards and make it harder for investors to obtain company records, changes that may be prompting more sophisticated, valuation-capable firms to take the lead.

According to a Bloomberg analysis of Delaware Chancery Court lawsuits, hedge funds have brought or tried to lead proposed class actions against at least 11 deals since last year, nine of them among the 14 cases filed this year, versus one in 2024. These suits typically allege that directors and executives breached fiduciary duties to shareholders; if successful, every investor in the public company benefits. The surge has coincided with a revival of appraisal arbitrage, in which funds buy shares after a deal announcement and challenge the price in court. If a judge awards a higher value, the petitioners keep the difference plus accumulated interest, an attractive proposition in the current higher-rate environment. At least five deals have faced both types of challenge. Class actions can be more appealing because plaintiffs are cashed out when a deal closes, whereas appraisal payments can be deferred until litigation ends, and appraisal can backfire if a judge awards less than the deal price.

Silver Lake has mounted the most vigorous defense. Its US$25bil take-private of Endeavor Group Holdings faces an appraisal case filed by dozens of investors, while Icahn Enterprises is co-leading a proposed class action against the deal. Silver Lake's lawyers argue that hedge funds buying after announcement should not be permitted to pursue fiduciary or appraisal claims, writing that neither remedy was intended as "a tool of financial engineering for professional investment firms." Silver Lake sued Icahn's firm in September, alleging collusion with some appraisal-case hedge funds; an attorney for Icahn's firm, Jim Woolery of Woolery & Co, called the allegations baseless. In October, Endeavor asked a federal court in New York to force Icahn's firm and an appraisal-case fund to disgorge profits, citing a six-month short-swing rule. Silver Lake said its price reflected arm's-length negotiations with a special committee and a 57% premium to Endeavor's trading price before an October 2023 announcement that it was exploring strategic alternatives. The judge has yet to rule on Silver Lake's request to remove Icahn's firm from the case.

Corporate attorneys have also criticized appraisal litigation, which is not covered by the Delaware overhaul, as a means of obtaining company records for class claims. Verition Fund Management was accused of exploiting appraisal in its challenge to Authentic Brands Group's US$1.4bil take-private of Guess? Inc; Guess's lawyers said the fund was attempting to "make an end-run" around the reforms. Verition later settled. Hedge funds have had mixed results in lead-plaintiff contests. In August, Empyrean, Verition and others lost the lead role in a class action over 3G Capital's US$9.4bil buyout of Skechers USA Inc to a Fiduciary Management Inc-managed mutual fund, the only contender that held shares before the announcement. Judge Lori Will has nonetheless shown willingness to share control, making Icahn's firm co-lead in the Endeavor case after it partnered with long-term shareholder Handelsbanken. Glazer Capital and Empyrean declined to comment; Verition did not respond, and Endeavor and Silver Lake declined to comment.