In the area with a bunch of Merrows and Unseelie, there is a large portion of water that is deeper than the average person.

Can I use Shark Form in this area? I get notices saying I am not underwater, but I am clearly below the waterline.

I believe the message was intended to signify when you're _leaving_ the water, not entering it. An attempt was made to make that area swimmable by sharks when shark form could only be used in underwater areas, but I do not think it was ever finished and instead we just rely on players to use the shark form per their best judgement (I think?).

The answer is yes, you may use shark form there.