MARCUS LECKY—Top Wall Street hedge funds are contesting Silver Lake’s buyout of Endeavor Group Holdings Inc. (Endeavor) with one of the largest appraisal demands in the history of Delaware, bringing back a trade strategy that lay dormant for years.
Appraisal arbitrage consists of buying a company’s shares after a deal is announced and then suing the company for a payout that exceeds the merger price. Under Delaware law, dissenting shareholders have the right to sue for the “fair value” of their shares if they disagree with the terms of a merger. Appraisal arbitrage funds scan the market for merger announcements where they think the merger price is too low. If they find such a deal, they load up on as much stock of the target company as they can, vote against the transaction, and then sue the company to get a higher price for their shares than the deal price. What makes this trade even more appealing is that Delaware law provides that you get interest on the money for the time the litigation is in progress (set at the Federal Reserve’s discount rate plus 5%), which lowers the risk for plaintiffs even further.
The appraisal arbitrage trade was very popular in the years following the Great Recession. However, several changes in Delaware law made this strategy more difficult for plaintiffs. In 2016, Delaware law was amended to allow acquirers to prepay the merger price to the plaintiffs. This meant that the company could pay the dissenting shareholders the merger price up front, and if the Court agreed that the merger price was fair, the plaintiffs would get no interest. The second change was that courts began to view the merger price as a strong indicator of fair value in an arm’s-length deal, making it much more difficult for shareholders to prove a higher valuation. Furthermore, the acquirer could convince the court that it overpaid for the target, in which case the dissenting shareholders would receive a lower price than what they would have received in the merger. The strategy became less appealing, and litigation largely dried up.
But now, top Wall Street players, including Elliott Investment Management, Man Group Plc, an AQR Capital Management affiliate, and many more, are bringing appraisal arbitrage back in the Endeavor buyout. Silver Lake, a private equity firm, bought Endeavor on March 24, 2025, at $27.50 per share. There are two factors that make this deal particularly attractive for appraisal arbitrageurs. First, the deal was procedurally questionable. Silver Lake owned the majority of Endeavor’s voting stock. This means that the minority shareholders had no say in the deal: Silver Lake just pushed it through. Second, Endeavor owned a large portion of another public company, TKO Group Holdings Inc. (TKO). TKO’s stock price rose before the deal closing, such that Endeavor’s stake in TKO alone was worth more than $27.50 a share. This means there is objective market evidence that the Silver Lake-Endeavor deal was potentially underpriced. To counter, Silver Lake is arguing that the purchase price was fair, and TKO’s stock price was inflated to create the illusion of a discount.
Hedge funds piled into Endeavor’s stock and are now contesting the price on $4.1 billion worth of shares. The litigation will likely take years to resolve. But the decision in the Endeavor case could signal a resurgence of appraisal arbitrage and bolster lawsuits by discontented minority shareholders.
