Under Italian law a shareholder of a joint stock company can exercise the right to withdraw in the cases provided for by law (for the list of cases see art. 2437 Civil Code for shareholders of a company limited by shares (S.p.a.), art. 2473 Civil Code for quotaholders of a limited liability company ( S.r.l.) and art. 2497-quater for shareholders of companies subject to the direction and coordination of other companies).

When a shareholder exercises his right to withdraw from the company, he is entitled by law to obtain payment for his holdings in respect of which he is exercising it (art. 2473-ter Civil Code for S.p.a. and art. 2473 Civil Code for S.r.l.).

The value of the holding is established by the directors, having obtained the opinion of the board, of statutory auditors as well as the legal auditor of accounts and is established taking account:

  1. a) of the company’s equity;
  2. b) of its income producing prospects; as well as
  3. c) any market value it may have.

The company’s bylaws may also provide for other criteria to establish the value of the holding, indicating the asset and liability items that may be rectified with respect to the figures shown on the financial statements (together with the rectification criteria), as well as other possible elements, capable of being valued, to be taken into consideration.

Clauses in the bylaws which establish payment for the holding in an amount equal only to its nominal value or taking into consideration book value only are considered unlawful.

In practice, instead, clauses that establish the value of goodwill, measured according to mathematical calculations in relation to the profitability in previous financial years are held lawful.  This criterion is, in fact, in line with the condition of the assets organised in the company, the overall value of which is not the sum of the static value of the individual assets but is inevitably influenced by business continuity prospects (so-called going concern) (see Italian Court of Cassation, Civil Division, 15 July 2014, no. 16168).

For listed companies, the value of the shares is normally established by referring exclusively to the arithmetic average of closing prices in the six months preceding publication of the notice calling the shareholders’ meeting, the resolutions of which entitle the shareholder to withdraw.

In these types of company, the bylaws may provide that the value shall be established also according to criteria a), b), c) set forth above, but, in any event, such value cannot be lower than the value that would be due applying the criterion of the arithmetic average of the last closing prices described.

In the event of disagreement among the shareholders as to the value of the holding, the law provides as a remedy, that the value can be established through a Sworn Appraisal of an Expert, appointed by the Specialised Division of the Business Court, by application of the withdrawing shareholder.

In this case the Expert will draw up the appraisal according to the criteria established by law or by the bylaws, within the term fixed by the judge.

The Expert appointed to draw up the appraisal is true Auxiliary of the judge (according to art 68 of the Italian Code of Civil Procedure) and, by express provision of law, he draws up his Report in the capacity of arbitrator (see art 1349 of the Civil Code).

This means that he operates as a party appointed to establish the performance of a contract according to a valuation criterion inspired by contractual equity, which, in this case, performs a function of balancing out the economic interests in play.

Given that he is classified as an arbitrator, consequently there are few remedies to challenge his Report on the value of the holdings: his Report can in fact be challenged before the Court only if it is “manifestly inequitable or wrong”.

Payment for the holding in respect of which the withdrawal has been exercised must be made within the inderogable term of 180 days from the date upon which the declaration of the withdrawal reached the company.

Normally the payment will be made through purchase of the holding of the withdrawing shareholder by the other shareholders in proportion to their holdings, or by a third party identified by mutual agreement among the shareholders.

** Lowenstein Sandler LLP thanks Fiorella F. Alvino and Andrea Alberto Belloli of Nunziante Magrone for their contributions to this blog.

By a July 19, 2019 ruling, Vice Chancellor Slights set the fair value of Jarden Corporation at its unaffected market price of $48.31, below the $59.21 per share value of cash and stock that Newell Rubbermaid had paid to acquire it. The court also performed a DCF analysis that corroborated its valuation. The court was critical of the merger process leading up to this deal and questioned the reliability of a merger-price-less-synergies approach given that factor as well as its findings that there was no pre-signing or post-signing market check and the evidence regarding deal synergies and how much, if at all, was received by Jarden, was conflicting and especially difficult to measure.

We expect further analysis and commentary on this case to follow and will post as it comes in.

Vice Chancellor Slights has decided the Jarden appraisal case, a claim stemming from the 2016 sale of Jarden to Newell Rubbermaid Corp. In the opinion, the Vice Chancellor ultimately awarded below merger price, relying on a number of factors and discussing the interplay of merger price, unaffected stock price, discounted cash flow analysis and deal process.

We will follow up with further commentary on Jarden.

In prior posts, we have explained various valuation concepts, including the discounted cash flow (DCF) and comparable company analyses. In this post, we examine how those concepts can be applied for tax purposes. Like an appraisal in Delaware, when determining the fair market value of a closely held corporation or ownership interest in a corporation for tax purposes, tax courts consider a broad array of factors and methods. Pursuant to Treasury Revenue Rule 59-60, factors to consider include a company’s worth, its revenues, industry information, and, in the case of a minority interest, the degree of corporate control enjoyed by the interest. In Estate of Gallagher v. Commissioner, No. 16853-08, 2011 Tax Ct. Memo LEXIS 150 (T.C. June 28, 2011), the Tax Court was asked, by way of notice of deficiency in federal estate tax, to determine the fair market value of membership interests in a Kentucky limited liability company included in the decedent’s gross estate. The Tax Court considered both a DCF analysis and a comparable companies analysis from two competing experts. Given the lack of comparable companies, the court relied exclusively on the DCF method. The experts also debated over the projections and growth rate of the subject company and various discounts to reflect the company’s status as an S corporation, the minority interest position, and lack of marketability. The court took parts of both experts’ analyses, but calculated its own discount rate and applied both a minority discount and a lack of marketability discount. The court ultimately concluded that based on a DCF analysis, the fair value of the shares as of the valuation date was $32,601,640, or $8,212 per share.

** Lowenstein Sandler LLP thanks Anish Patel, a student at Seton Hall Law, for his contribution to this blog.

Texas recently forayed into appraisal by applying its statute to a corporation’s plan of merger. Subchapter H of Chapter 10 of the Texas Business Organizations Code provides that a voting shareholder of a for-profit corporation who dissents to a plan of merger is entitled to “obtain the fair value of [its] ownership interest through an appraisal.” TEX. BUS. ORGS. CODE ANN. § 10.354(a)(2).

In Am. Bank, N.A. as Tr. of Lisa Marie Buckley Tr. v. Moorehead Oil & Gas, Inc., 2018 WL 6219635, at *1 (Tex. App. Nov. 29, 2018), there was an additional wrinkle – the dissenting shares from the corporation’s plan of merger had been bequeathed to the trusts. Section 10.361(g) provides that a “beneficial owner of an ownership interest subject to dissenters’ rights held in a voting trust or by a nominee on the beneficial owner’s behalf” may file a petition for a valuation in that situation.

In Moorehead, the trusts had inherited a 3.8 percent stake in the oil and gas company Moorehead. Shortly thereafter, Moorehead finalized plans to reorganize itself, through a merger, to become a limited liability company, whereby the trusts’ shares would be canceled and converted into cash. The beneficiaries of the trusts objected to Moorehead’s valuation of $7.30 per share and filed an action seeking appraisal and recovery of the fair market value of their shares. Moorehead filed a motion for summary judgment on the grounds that (1) the petition was untimely because the original petition failed to correctly name the trustees of the trusts, and (2) several of the plaintiffs lacked standing.

The Court applied the doctrine of misnomer and found that the amended petition related back to the date of the timely filed petition. However, the Court dismissed the claim in part based on lack of standing. While the bank plaintiff had capacity to sue as trustee, the Court held that the beneficiaries of the trusts lacked standing as beneficial owners because the shares were never held in a voting trust or by a nominee, as is required pursuant to Section 10.361(g).

Chief Justice of the Delaware Supreme Court Leo Strine has announced he will retire this fall. Readers of the blog will recognize that Chief Justice Strine has been involved in numerous appraisal decisions including Aruba and others and has spoken about the appraisal remedy at length.

The Chief Justice was previously a Vice Chancellor, before his elevation to the Delaware Supreme Court.

According to the Cape Times, South African real estate investment trust Hospitality Property Fund (“HPF”) was recently ordered by the South African High Court to reinstate certain shareholders and pay them a dividend as the result of an appraisal rights action under Section 164 of the South African Companies Act – that country’s appraisal regime.  HPF has combined two classes of its shares, which, under South African law, apparently triggered appraisal rights. A subset of HPF shareholders dissented and an appraisal proceeding has been working its way through the Courts. Whether this will be the end of the appraisal proceeding is unclear. South Africa remains a regular source of appraisal news, as we’ve covered before.

Yes, in sum. The two terms are often used interchangeably in the literature. Certain countries or jurisdictions have a stronger tradition of referring to these important shareholder rights as either appraisal rights – focusing on the remedy – or dissenters rights – focusing on the entitlement. Arguably, dissenters rights may be thought of as broader than appraisal rights since dissenters rights can encompass remedies other than appraisal. And the appraisal remedy, through quasi-appraisal, may be available to those who do not dissent. But these somewhat philosophical distinctions are less relevant than common usage, and in common usage, dissenters rights and appraisal rights are the same.

Is the “go shop” still an effective tool for ensuring the maximization of business value? Maybe not – according to recent research by Prof. Guhan Subramanian of Harvard Business School. A “go shop” provision, in short, is when a seller comes to agreement with a buyer, but then there is a post-agreement process where the seller seeks out alternative, better, deals (or ‘shops’ the company). If no higher bidder is found – so the logic goes – than the original deal must have been a value maximizing one. A 2008 study of go shop provisions was positive: using a small samplesize, the study found that go-shops were yielding a topping bidder a significant amount of the time, and were resulting in increases in value to shareholders.

Does newer data continue to show evidence of the efficacy of go shops?  Not so much, say the authors. In the new data set – now focused on deals from 2010 to 2018, go shops resulted in a higher bidder only 6% of the time, and then only 2.5% of the time in 2015-2018. And what explains this (setting aside that the n of the original study may have been too small to be meaningful)? One option, which the authors discount, is that the go shop provisions themselves got worse – shorter periods, higher termination fees, etc. But the second option, which the authors focus on, does not bode well for shareholders who look to a go shop as protective: modern go shops have introduce are structured in ways to make a topping bid unattractive while giving the window-dressing of a go shop process – i.e., match rights, short windows in large deals (as opposed to in smaller deals as before), and technical changes to the proposal to require a topping bidder to launch a full-blown acquisition during the period  – all leading to the authors view that merger participants, including management and the investment banks have conflicts of interest when it comes to the go-shop. From an HLS Forum blog post on the article: “Conflicts of interest for management also hinder the effectiveness of go-shop processes. CEO’s often have a financial incentive to keep the deal price down, which means discouraging potential third-party bids during the go-shop process. And in some instances, CEOs have undisclosed qualitative reasons for discouraging third-party bids.”

Are go shops still working? Well, the authors have this to say: “At the highest level, the story of the go-shop technology over the past ten years is one of innovation corrupted: transactional planners innovate, the Delaware courts signal qualified acceptance, and then a broader set of practitioners push the technology beyond its breaking point.”