Silver Lake has launched a legal challenge against activist investor Carl Icahn that could have wider implications for hedge funds using appraisal rights to contest the valuation of companies taken private through mergers and buyouts, according to a report by Bloomberg.

The private equity firm filed a lawsuit on September 21 targeting Icahn's challenge to its roughly $25bn acquisition of Endeavor Group Holdings, the parent company of TKO Group Holdings, which owns UFC and WWE.

The dispute centres on appraisal arbitrage, a strategy in which investors acquire shares after a transaction has been announced and subsequently ask Delaware's Chancery Court to determine whether the agreed deal price fairly reflects the value of their holdings.

Silver Lake's complaint alleges that Icahn worked with dozens of investment funds pursuing appraisal claims connected with the Endeavor transaction. The case seeks to challenge the legal basis that has allowed investors to bring such claims regardless of when they acquired their shares or their reasons for doing so.

Appraisal litigation has become more significant for investors following changes to Delaware corporate law that have made some alternative forms of shareholder litigation more difficult. The strategy had previously declined sharply following a series of Delaware Supreme Court rulings that reduced the circumstances in which judges could award shareholders a higher price than the agreed transaction value.

Those rulings stemmed in part from litigation surrounding Silver Lake's 2013 deal to take Dell private alongside founder Michael Dell. Delaware courts subsequently established a more constrained approach to appraisal valuations, although investors could still potentially receive a lower valuation than the merger price.

The market for appraisal arbitrage has nevertheless shown signs of renewed activity following changes to Delaware's corporate statute. Major transactions currently facing appraisal challenges include Endeavor's buyout, the approximately $9bn acquisition of Skechers, the $8bn purchase of Clearwater Analytics, and Select Medical's roughly $4bn sale.

The Endeavor case is particularly significant because it includes both an appraisal proceeding and a separate class action led by Icahn. Funds involved in the appraisal litigation collectively held shares worth about $4.1bn at the deal price, making it the largest appraisal case of its kind.

Icahn and the funds have argued that the Endeavor transaction undervalued the company, including its controlling interest in TKO Group Holdings. Silver Lake has disputed that assessment, arguing that subsequent appreciation in TKO's shares has influenced perceptions of the deal's value.

The cases also focus primarily on whether a transaction price accurately reflected a company's value, rather than requiring courts to resolve broader questions about board independence or potential conflicts of interest.

That distinction could make Silver Lake's challenge particularly consequential if it seeks to restrict the ability of funds to purchase shares after a deal announcement and subsequently pursue an appraisal claim.