Twist in AXA-Mony Deal: Threat of Appraisal Rights

As the pending merger deal between AXA Group (AXA - commentary - Cramer's Take) and Mony (MNY - commentary - Cramer's Take) heads toward its contested vote on Feb. 24, an archaic form of shareholder protection is coming to the forefront.

Appraisal rights are seldom-used legal rights available to shareholders in most cash deals. They are an appeal mechanism that uses the state courts for shareholders who are disgruntled over the price they are to receive in a merger. To invoke these rights, a shareholder must comply carefully with the specific requirements of the state of incorporation of the target, and that typically involves affirmatively stating the holder's desire to seek judicial appraisal for his or her shares and voting against the deal.

Too Cheap?

AXA's pact to purchase Mony is highly controversial, as has been discussed on this site extensively by myself and David Merkel. In short, the institutional shareholders, led by Highfields Capital, Third Avenue Funds and Southeastern Asset Management principally accuse the Mony board of selling the company too cheaply. They seek to get a better price for their shares through a higher bid from another insurer or, alternatively, to vote down the deal, replace the current board and management, and operate the company as an ongoing, independent company.

Reminiscent of the 2002 deal to merge Hewlett-Packard (HPQ - commentary - Cramer's Take) and Compaq, the vote is too close to call at this early date. The hurdle for the dissidents is high: They need to prevent the company from attracting half the outstanding shares. The company's inherent advantage is immense. Mony management can spend liberally from the company's kitty and rely on the reflexive habit of retail holders to vote as the board recommends in the proxy. Because Mony is the product of a recent de-mutualization, an unusually large number of shares are still held by former policyholders.

To equalize this disadvantage, the dissident holders are using the threat of appraisal rights. Many specific aspects of the deal make this threat credible. First, there's an explicit condition that AXA is not obligated to close the deal if more than 10% of the holders elect appraisal rights; 11% already have. Second, if AXA waives the condition and closes, it is exposed to an open-ended financial risk to pay "appraised value" for the shares that have elected this treatment.

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David Brail is a senior analyst at Para Advisors, Inc., which manages event-driven hedge funds, and has been an investor in risk arbitrage and bankruptcy securities since 1987. At the time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Brail appreciates your feedback and invites you to send any to [e-mail].