Appraisal rights can offer investors critical protections against corporate actions that do not provide shareholders fair value. Investors often recognize this – as we recently posted, proxy voting guidelines suggest investors vote in favor of appraisal. And then there are the Corporate Governance Principles [.pdf] of the Los Angeles County Employees Retirement Association (LACERA), which list appraisal rights as one of the corporate structures that LACERA finds important in companies it invest in, writing “Appraisal Rights: Investors should be afforded appraisal rights by which they may seek a judicial review of the terms of certain corporate transactions in order to determine fair market value.”
Like most states, Maryland law affords certain protections to minority stockholders, including “objecting stockholder rights” (also known as “appraisal rights” or “dissenter rights” in other jurisdictions) under the Maryland General Corporation Law (“MGCL”) pursuant to §§ 3-201 et seq. However, unique to Maryland is the ability for a Maryland corporation to eliminate a stockholder’s appraisal rights by charter provision under MGCL § 3-202(c)(4).
One might ask: Why would a stockholder ever invest in a corporation that eliminates appraisal rights in the charter? The answer may be that the stockholder didn’t, but the provision was added to the charter by amendment after the stockholder invested.
In Mark G. Egan et al. v. First Opportunity Fund, Inc., et al., Case No. 24-C-14-008132 (Cir. Ct. Balt. City, April 22, 2016), the Circuit Court for Baltimore City was presented with a fact pattern whereby a charter amendment eliminating appraisal rights was proposed and approved immediately prior to the approval of a transaction that would have otherwise triggered a minority stockholder’s appraisal rights under Maryland law. Aggrieved stockholders filed suit, but the Egan court held that the charter amendment was permitted under MGCL § 3-202(c)(4), as it was (i) recommended for approval by the board of directors and (ii) approved by the requisite number of stockholders.
While the decision in Egan is not binding precedent in Maryland, the court’s reasoning is supported by a plain reading of the statute. Management and controlling stockholders now have powerful tools to close a deal even if there is a concern about objecting stockholders when one considers: (i) the decision in Egan and (ii) Maryland’s express statement under MGCL § 2-405.1(h) that additional board duties or a heightened level of scrutiny do not apply in the context of a sale or change of control transaction (so-called Revlon duties).
One might ask what a stockholder can do to protect herself from these “disappearing” appraisal rights. Some practitioners believe that MGCL § 3-202(a)(4) (which provides that appraisal rights are triggered when the charter is amended to adversely change express contract rights contained in the charter) can provide some relief if a charter is amended to eliminate appraisal rights. There are two issues with this view:
- First, MGCL § 3-202(a)(4) applies only if the charter has not reserved the right to adversely change express contract rights. In practice, this reservation of right has become quite standard in charters for Maryland corporations.
- Second, as decided in Egan, appraisal rights are statutory rights, not contract rights. In Egan, the charter in question did not reserve the right to adversely change express contract rights, but the court held that the charter amendment did not trigger appraisal rights under MGCL § 3-202(a)(4) because, even though the amendment was adverse to the stockholders, it altered a statutory right, but not an express contract right.
With this in mind, an investor concerned about protecting his appraisal rights prior to investment should negotiate (1) a deletion of any charter language that reserves the right to alter contract rights in the charter without triggering appraisal rights and (2) the insertion of Maryland’s statutory appraisal rights within the four corners of the charter to transform it into an express contract right. Another approach would be for the stockholder to insist on an express approval right for any charter amendment that eliminates appraisal rights.
All these steps seem a bit impractical. Unlike a majority stockholder (or even a majority of a minority preferred class that can negotiate express voting rights), the reality is that a true minority stockholder has little leverage to impact the negotiations of a charter provision. Ironically, the inherent weakness of a minority stockholder’s position is one of the reasons for statutory protections such as appraisal rights. To add insult to injury, a minority stockholder may also be confronted with a host of other practical issues outside the charter, such as a contractual drag-along right that serves as an elimination of appraisal rights.
Given the Egan decision, a stockholder of a Maryland corporation should be mindful that the appraisal rights she thought she had today might be gone tomorrow.
** Lowenstein Sandler LLP thanks Ryan Stoker of Whiteford, Taylor & Preston LLP for his contribution to this blog. Mr. Stoker’s practice focuses on corporate and transactional. His bio can be found here.
The Taft-Hartley Proxy Voting Guidelines for 2019 have been released by Institutional Shareholder Services. The guidelines, which many institutional investors follow, suggest that shareholders vote “for proposals to restore or provide shareholders with the right of appraisal.” As we’ve covered before, there is meaningful academic work tying the existence of, and exercise of appraisal rights, to increased value for shareholders, and that is in line with the proxy guidelines suggestion.
Law professors who filed an amicus brief in support of petitioners in the Aruba case have provided a useful summary of their arguments in this blog post from the Harvard Law Corporate Governance Forum. With market efficiency issues increasingly intersecting with more traditional valuation and process issues in appraisal cases, this amicus could be particularly relevant to the Delaware Supreme Court as it considers the Aruba appeal. For more on Aruba, see our multiple posts.
On March 27, 2019, at 10 a.m., the Delaware Supreme Court will hold argument in the Aruba Networks appraisal case.
We’ve covered the Aruba decision before, along with some of the impact the case has had on the appraisal landscape. Little doubt the argument before the Delaware Supreme Court will be enlightening to anyone interested in appraisal; we’ll have a further update after the argument.
The vast majority of publicly announced mergers are approved by shareholders, certainly more than 90% no matter how you reasonably slice the data. One way to view this data is that shareholder votes are perfunctory rubber stamps; but another is to view the merger process as self-selecting – a publicly announced merger is one that acquirer and target believe will receive shareholder approval. In the latter case, the threat of failure is the motivating factor that effects the offer price pre-announcement; it is not the vote itself. And we see this in practice as well. It is the incredibly rare instance where an acquirer makes in seriatim bids, watching each fail in turn trying to find the price that gets the acquirer the necessary votes: we just don’t see this, period.
And if the vote itself is not what generates value to shareholders, then what of the costs of the vote itself? Voting takes time – sometimes a long time. This fact particularly intersects with appraisal since when is an important question when determining value.
Professor Matteo Gatti takes on the question of reducing the cost of merger voting in his 2018 article “Reconsidering the Merger Process: Approval Patterns, Timeline, and Shareholders’ Role.” [pdf via Hastings Law Journal]. The Professor proposes three potential reforms: (1) on-demand voting (meaning a threshold number of shares, perhaps 10%, must request a vote for a full vote to be needed); (2) randomized approval (meaning only a certain percentage of proposed mergers would be subject to a vote, but without knowing if their merger would be selected, the management teams would still be under threat and thus exercise their obligations to maximize value; while the non-selected mergers would get a more efficient approval); and (3) shorter approval timelines (shorten the SEC review process; shorten the 20 days Delaware requires for investor consideration of a preliminary proxy; etc.).
How would these changes affect appraisal? While Professor Gatti seeks to preserve appraisal rights in any of the proposals, changes would obviously be required to maintain the appraisal remedy; and more importantly, to retain a robust appraisal remedy that continues to provide enhanced premia to shareholders in mergers. Notably, in any proposal eliminating instances where every shareholder is given a voting opportunity (such as proposal 2, randomized approval), it may be incumbent on the legislature or courts to formalize the view that while voting “yes” on a merger is a bar to appraisal rights, any other action, including silence in the case that voting rights are not actually provided, abstention, or voting no, preserves appraisal rights. No doubt these are interesting proposals to change the merger process, and the appraisal remedy could surely be adapted to any of them.
One other idea for making voting more efficient? Blockchain – something we’ve covered multiple times before.
No. At least according to Vice Chancellor Slights III in the case In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018). While it is true that in many circumstances appraisal is the exclusive remedy… not always!
Xura highlights that the facts of each case matter and that an investor needs to think about the full suite of their potential claims and options in any merger dispute.
For more on Xura, see this coverage.
The Delaware Supreme Court has a few appraisal cases on its docket in 2019, including a case regarding what constitutes a robust – “Dell Compliant” – sales process as well as a case regarding how to understand synergies in appraisal. For a view of 2019 cases of note, see this coverage by law.com [$$$].
In 2017, Rwanda amended its companies act and introduced appraisal rights for minority shareholders [.pdf]. A recent article in the New Times provides an overview of, and reflects on, the efficacy of Rwandan appraisal. The parallels between Rwandan appraisal (as described in the links provided) and Delaware appraisal are notable: appraisal is offered to dissenting shareholders who would otherwise be forced to accept certain major corporate actions (such as a merger); the dissenting shareholder must demand appraisal; and the Company must then pay the dissenter “fair value” for their shares; and strict timelines govern the entire process.
Notably different is that in Rwanda (again, according to the sources noted) the determination of fair value occurs by a set of arbitrators. Who appoints the arbitrators, precisely what criteria they shall use, and whether the dissenter then has recourse to the Rwandan courts is not made clear from the Act. While this is certainly different than what we see in Delaware, requiring arbitration of appraisal rights is not without precedent in the US. See, for example, this notice of appraisal rights to limited partners that requires arbitration.
What is particularly notable about Rwanda is that the appraisal rights provided are new – now only two years old. As with other jurisdictions like Delaware, the Cayman Islands, or South Africa, no doubt the progress of cases and practical experience among deal lawyers and others will refine the appraisal practice in that country over time.
Probably not. But this interesting analysis on the possibility of crypto asset mergers certainly allows for the possibility. We’ve covered blockchain and appraisal before, including the possibility of having shares put onto a blockchain, allowing for easier tracing, counting, voting, and other improvements over the current system of fungible bulk; but this is something different. If one crypto asset (one blockchain community effectively) ‘merges’ with another, it could be a rule of the crypto asset to provide for appraisal rights – allowing dissenting crypto asset holders an ‘out’ of some kind (whether involving a court, a formula, or some other procedural or mechanistic system).
Thinking about new assets helps put in context that appraisal rights are a simply a procedural rule regarding ownership – while the most common and talked about use of appraisal rights is with respect to stock (and involving mergers), there are numerous other examples of appraisal rights in practice including with private companies, appraisal by contract, and – perhaps in the future – crypto assets.