DEPLOYING a rarely used tool for hedge funds, Carl Icahn’s firm and other investors are spearheading proposed class actions that challenge multibillion-dollar buyouts of public firms.
The hedge funds, which also include Glazer Capital and Empyrean Capital Partners, are 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 contend are too low.
Their legal battles are unfolding in Delaware, home of the premier business court in the United States, which overhauled its corporate law last year after Elon Musk’s frustration with a prolonged legal fight over his record pay package spurred him to quit the state and reincorporate Tesla Inc in Texas.
Delaware’s changes aim to entice firms to stay by loosening the standards for deal approval and by making it harder for investors to obtain company records to fight buyouts.
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• This surge in litigation coincides with recent Delaware corporate law reforms that loosened deal approval standards and restricted investor access to company records, prompting sophisticated investors with greater valuation expertise to step in where individual shareholders and pension plans have traditionally led.
• Data indicates a sharp rise in such legal challenges, with hedge funds filing or attempting to lead at least 11 cases since last year, including nine in the current year alone, compared to just one case in 2024.
• Hedge funds are also reviving appraisal arbitrage strategies, where they buy shares post-announcement to contest the price in court, potentially profiting from the difference if a judge awards a higher valuation, a tactic that is particularly attractive in the current high-interest-rate environment.
• Private equity firms, such as Silver Lake defending its US$25 billion Endeavor Group Holdings buyout, are pushing back against these suits, arguing that professional investors should not use litigation as a financial engineering tool to profit while hedging downside exposure.