Hedge Funds Lead a Wave of Delaware Suits Challenging Take-Private Deals

What is happening in Delaware courts

Hedge funds are moving into a lane long occupied by individual holders and pensions, stepping up to lead proposed class actions that argue take-private prices shortchange shareholders. Icahn Enterprises, Glazer Capital and Empyrean Capital Partners are among the firms out front.

These cases commonly allege that directors and executives violated their fiduciary obligations. If a class action succeeds, the recovery goes to all investors in the former public company. As plaintiffs attorney Jonathan Kass of Reid Collins & Tsai put it, "Until relatively recently, hedge funds were generally content to let someone else take the leadership role in a Delaware class action," and sophisticated investors are now seeing companies "truly pushing the envelope if not ignoring it altogether."

Bloomberg's review of Chancery filings shows that from last year onward, funds moved to file or vie for lead status in proposed class actions spanning no fewer than 11 transactions, and nine of the 14 such cases were filed this year. In 2024, just a single case showed up.

How hedge funds pair class claims with appraisal

The class-action push is arriving alongside a renewed appetite for appraisal cases, the standard hedge fund route to contest deal prices. In appraisal arbitrage, funds buy after a deal announcement and ask a judge to set fair value. If the court sets a higher number, they keep the difference plus accumulated interest, which is more enticing when rates are higher.

Some deals are facing both tracks. Since last year, at least five buyouts have drawn both proposed class actions and appraisal challenges. Class actions can be attractive because investors generally get paid at closing, while appraisal petitioners can wait until the end of litigation and risk a valuation below the deal price.

Hedge funds are also taking flak for using appraisal litigation, which was not altered by the legal overhaul, to obtain records and then file class claims. Earlier in the year, critics said Verition Fund Management used that playbook in Authentic Brands Group's $1.4 billion transaction to take Guess? Inc. private.

Guess's attorneys argued the tactic tried to "make an end-run" around the changes aimed at bringing more certainty to buyouts. Johnson Van Kwawegen responded in a filing that "well-established precedent" permits Verition to seek appraisal and then leverage that information to pursue further claims. Verition later settled its case.

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The high-profile Endeavor fight and the accusations flying

Silver Lake has mounted the most aggressive defense. Dozens of investors filed an appraisal case against its $25 billion buyout of Endeavor Group Holdings, while Icahn Enterprises, known for activist investing, is serving as a co-lead plaintiff in a proposed class action aimed at the same transaction. Silver Lake argues funds that buy after a deal is announced should not be able to bring fiduciary or appraisal claims. Its lawyers wrote, "Neither remedy was intended to serve as a tool of financial engineering for professional investment firms to profit through litigation while hedging their downside exposure," and, "Facilitating a litigation casino was never the point of the appraisal remedy or the breach of fiduciary duty cause of action."

In September, Silver Lake sued, alleging Icahn's firm colluded with some hedge funds behind the appraisal case. An attorney for Icahn's firm described the allegations as baseless and asserted the investment decision was made independently. "There was no coordinated scheme and he is not seeking appraisal," said Jim Woolery of Woolery & Co., co-counsel to the Icahn parties. "These vacant accusations are an obvious attempt to distract from our clients' documented claims that Silver Lake and Endeavor's insiders improperly took billions of dollars in value from Endeavor's shareholders."

In October, Endeavor petitioned a New York federal court to compel Icahn's firm and a hedge fund connected to the appraisal case to disgorge any trading profits, arguing the insider short-swing rule requiring forfeiture of gains from purchases and sales within six months applies. Defense counsel rejected those allegations in their submissions.

Lead-plaintiff battles have been mixed for hedge funds. In August, Judge Lori Will picked a mutual fund managed by Fiduciary Management Inc. to lead the class case challenging 3G Capital's $9.4 billion deal for Skechers USA Inc., noting it was the only contender that owned shares before the announcement. The court has not yet decided Silver Lake's bid to oust Icahn from the case.

Glazer Capital and Empyrean both declined to comment. Verition did not answer requests for comment. A spokesperson said Endeavor and Silver Lake would not comment.

Why this matters for your portfolio

The revisions Delaware enacted last year aimed to retain incorporations by relaxing deal-approval thresholds and restricting investors' access to the records they use to challenge buyouts. As a result, more sophisticated firms with valuation chops and ample resources may be stepping forward to front these cases.

Some attorneys argue funds should not use litigation to juice returns. Others note that when fiduciary or appraisal challenges succeed, public shareholders can benefit through higher payouts.

The bottom line: legal risk and potential upside from court fights are increasingly part of the pricing in take-privates. Watch who owned before a deal and who bought after, because that can determine who leads the lawsuit and how the outcome hits your stake.

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