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Appraisal Rights Litigation Blog

Appraisal Basics

At their most basic, appraisal rights, also known as dissenter’s rights, give an investor the right to demand that a court determine the value of his or her stock that would otherwise be subject to divesture. The most common situation in which appraisal rights are asserted is when common stockholders in Delaware corporations are given the statutory right to demand appraisal to compensate for their shares being “cashed out” in a merger, typically at a time when the stockholder would prefer to remain long in its position or at a merger price that the stockholder believes is too low. In sum, by invoking appraisal, 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.

In Delaware, for example, an investor may hold stock in a Delaware company traded on a national exchange, which we’ll call “Target Co.” Target Co.’s board agrees to a merger wherein Target Co. will be bought out by “Buyer Co.” for $10 a share. Generally, regardless of what price the investor acquired his or her shares of Target Co., the investor can invoke appraisal rights if it owns Target Co. stock and votes “against” the merger with Buyer Co. (or simply abstains). Perhaps the investor believes that Target Co. is worth more than $10 a share, or that the process used in the acquisition was suspect – or perhaps the investor simply does not see the benefit of being forced to tender his or her shares for $10 when it sees much more intrinsic value in the company, despite the price that Buyer Co. is willing to pay for Target Co. This is the environment in which an appraisal claim arises. Delaware law, as well as the laws of a number of other states (and even countries) provide the investor the ability to seek an “appraisal remedy.” A court will ultimately perform a valuation of Target Co., usually after a “battle of experts” presents 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 to determining Target Co.’s going concern value, the court will also award interest on that amount.

Appraisal rights are often recognized by scholars and commentators as an important aspect of investor rights, especially for minority investors who are invested in companies that may be controlled by a single shareholder or collection of shareholders. By providing for appraisal rights, a jurisdiction like Delaware provides investors with a powerful tool to protect the value of their investment against unfair, opportunistic or simply ill-timed bids by allowing the investor to require a court to determine the fair value of the securities notwithstanding the deficiencies of the market process.

This blog covers all aspect of Delaware appraisal rights, but at times addresses other jurisdictions as well. We discuss a variety of issues relevant to appraisal rights and their position within the realm of investor rights generally.

Please see: Valuation Basics