What are shareholder appraisal rights?
An appraisal right is the statutory right of a corporation's minority shareholders to have a judicial proceeding or independent valuator determine a fair stock price of their shares that would otherwise be subject to divesture, and oblige the acquiring corporation to repurchase shares at that price.
Valuation methods in determining the fair stock price.Analysts may use multiple valuation methods in determining the fair stock price and value of the acquired company, including asset-based methods, income or cash flow methods, comparable market data models, and hybrid or formula methods. A court will ultimately perform a valuation of the target company using experts who provide competing valuation theories and methodologies, and will award the investor who invoked its rights the value of the shares in the company as a going concern that the court found to be fair. In addition, the court will also award interest on that amount. In mergers and acquisitions, appraisal rights guarantee that shareholders receive adequate compensation if they believe a merger or acquisition undervalues their shares.
What triggers appraisal rights?The nature of the corporate action which triggers this right differs in every state. For example, some states make appraisal rights available in an asset purchase transaction or when a company makes certain amendments to its certificate of incorporation, while others do not. However, almost all states consider corporate consolidations and mergers as transactions triggering appraisal rights. By invoking appraisal rights, an investor uses the law to ask a court to determine the value of his or her shares of stock, or other securities, even though a company board or a special committee has decided to agree to a merger, acquisition or other transaction.
While most occurrences of appraisal rights are based on consolidation or mergers, they may also apply to instances when the corporation takes any extraordinary action that shareholders deem harmful to their interests.
How to perfect appraisal rights.In order to perfect appraisal rights, the dissenting stockholder must follow the requirements set out in the applicable state statute, or else the stockholder permanently risks losing its right to an appraisal. Additionally, the corporation that is the subject of the appraisal demand (usually the target company) must comply with certain procedures to respond to and participate in the appraisal proceeding. Though many states employ a similar structure for a stockholder to perfect these rights, each state has its own unique characteristics to the process.
Also, some states such as, Delaware permit these rights to be provided contractually to partners in a partnership and members in a limited liability company by including such rights in the applicable partnership agreement or LLC agreement.