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Does Washington state offer appraisal rights (also known as dissenters rights)?

Yes it does – according to this post from the Jacob Freeman Law Firm in Seattle.  And unlike Delaware (indeed, unlike the majority of US states), Washington does not have a “market out exception”.   We’ve covered before that the somewhat maligned “market out exception” can prevent appraisal rights when a minority shareholder can sell their shares into a market, making Washington a potentially favorable state for appraisal.

Also of relevance to those looking at appraisal rights: “Washington courts disfavor discounts in determining the “fair value,” including in particular marketability discounts and discounts for built-in capital gains.”

Readers of this blog know that different states have different rules; when thinking about appraisal rights, it is critical to

Read more about Washington appraisal rights.

 

 

The Delaware Supreme Court has had its say on whether Directors and Officers insurance policies that covered claims for “actual or alleged” violation “of any federal, state or local statute, regulation or rule or common law regulating securities” covered appraisal actions – which, at least by statute, do not require any evidence of wrongdoing.  The Court’s answer was clear, and the opinion unanimous: appraisal actions are not covered by D&O policies with this language.  The Court reasoned: “Because appraisal actions involve no adjudication of wrongdoing, they do not involve ‘violations’ of any law or rule, and thus, they do not fall within the definition of a ‘securities claim[.]”

We have covered the twists and turns of this dispute on a few occasions.

While there are likely to be a number of insurance practitioners covering this decision from the insurance side (see here as an example), we also note there are appraisal law takeaways of relevance:

  • Reaffirmed: Appraisal does not require proof of wrongdoing.  This decision reaffirms the doctrine that appraisal actions do not require proof of wrongdoing.  There need not be a violation of law for an appraisal action; rather, appraisal is, in theory, a ‘fact finding’ exercise where the Court sets the fair value of the relevant securities.  Appraisal is a “neutral proceeding” – even though there are parties on both sides and it looks much like an adverse litigation.
  • Appraisal cases can be expensive!  This case is a window into the costs for a defendant in an appraisal case: here, Solera alleged over $13 million in defense costs.*
  • Valuation Date matters.  (We’ve mentioned this before.) The Court observed that: “the valuation date under Section 262 is as of the date of the execution of the merger, not the date the merger agreement is executed” and viewed this as suggestive that “an appraisal action is not designed to address alleged wrongdoing relating to the merger process[.]”  The Court further wrote: “Rather, any such alleged wrongdoing is frequently addressed, as it was here, in a separate stockholder fiduciary litigation brought by stockholders against the target board’s directors.”
  • Future Litigation: What about Intertwined Cases?  The Court did not adopt or address the policyholder’s arguments that appraisal doesn’t occur in a “vacuum”.  Here, the policyholder argued that the underlying case involved allegations of a rigged sales process.  The fact the Court did not engage on this point leaves open a significant area for future litigation.  Appraisal cases are often in the company of Section 220 inspection rights demands, breach of fiduciary duty cases, disclosure violation cases, and even securities fraud allegations.  Indeed, the Court acknowledged as much in the quotation above.  Future insurance litigation may well focus on the nexus between such cases:  can an insurer not cover an appraisal action if that action is intertwined, as an example, with a fiduciary duty action?  Or what if the appraisal action directly led to the additional case, something we’ve covered before?
  • Future Litigation: Questions Left Open.  The Supreme Court’s ruling left some questions open as well, including about interest and the consent to counsel.
  • Policy language matters.  This decision, and a prior insurance decision, concern specific policy language.  Policyholders with different language may be in a different position.  So we cannot posit a rule that no D&O insurance covers appraisal, but policies with this common language, and Delaware choice of law, do not.  D&O Diary provides a more extension explanation of the relevant policy language and why that matters here.

See the opinion here [.pdf]

See further coverage.

*Attorneys from RKS, though not the author, represented petitioners in the Solera appraisal action that brought about this dispute.

 

 

IRS & Business Taxation of the Cannabis Industry

Further to our prior post on FTI’s cannabis valuation primer, FTI has now published an update addressing developments resulting from Canada’s legalization of the production and sale of edible cannabis, cannabis extracts and cannabis topics, as well as the slower-than-expected growth of the Canadian cannabis industry.

Intranational, international, and even supranational regulatory issues can be a relevant component of cannabis valuation – perhaps more so than in more traditional businesses.  Regulatory developments can be linked to increased, or decreased valuations, and the likelihood of future regulatory developments can call for increased analysis.

IRS & Business Taxation of the Cannabis Industry

The valuation of companies in the ever-growing cannabis space has become an increasing area of focus within this valuation sphere.  Cannabis presents a highly unique valuation landscape given the regulatory environment, increasing popular acceptance of recreational as well as medical usage, and the expanding product mix as between flower, oils and edibles, and challenges and opportunities facing vertically integrated businesses trying to find the right balance as between their cultivation, lab & extraction, manufacturing and retail sectors.

As a reflection of this trendline, many traditional valuation, accounting and investment banking professionals have turned their attention to cannabis and the unique valuation analyses associate with it.  For example, FTI has prepared this white paper outlining valuation approaches to cannabis in this evolving market.

We’ll continue to cover cannabis valuation issues and how they are both similar, and very different, from traditional valuation debates.

 

Shareholder rights (at least in Delaware) include the right to inspect the books and records of the company for a “proper purpose”.  What is a proper purpose? We’ll be covering a number of cases in the coming months on this oft-contested issue.  For today: enter Woods Tr. of Avery L. Woods Tr. v. Sahara Enterprises, Inc., No. CV 2020-0153-JTL, 2020 WL 5200421, at *5 (Del. Ch. July 22, 2020), judgment entered sub nom. In re Woods v. Sahara Enterprises, Inc. (Del. Ch. 2020), reaffirming the proposition that the ascertainment of the value of a shareholders interest in a (here, private) company is a proper purpose.

In Woods, a trustee sought books and records from a private company in order to determine the value of the Trust’s interest in the company.   The company argued that a shareholder claiming a valuation purpose should be required to show not only a proper purpose for the investigation, but also a proper ‘end use’ for the resulting valuation.  In other words: was the trustee really seeking books and records to establish a valuation?

The Chancery Court dismissed this argument, writing “The Company’s position is contrary to Delaware law. It would require that a stockholder establish both a proper purpose (valuing shares) and an end use for the resulting valuation.” The Court continued: “It is sufficient under Delaware law that a stockholder has a proper purpose reasonabl[y] related to its interests as a stockholder, such as valuing its shares.” The Court refused to engage in the end use analysis as beyond Delaware law.

The Woods case contains additional analysis beyond the proper purpose analysis that we will cover in the future.

For investors, the scope of what is a proper purposes versus improper purpose is critical to determining their inspection rights.  One tentpole: valuation of an interest is generally a proper purpose.

AmerisourceBergen Corp. has asked the Delaware Supreme Court to reverse a Chancery Court ruling allowing shareholders the right to investigate the company’s books and records for corporate wrongdoing in connection with the opioid crisis.  Amerisource Bergen argued before the full five-member panel that Vice Chancellor Laster’s prior ruling went too far and invites harassment.

Books and records rights (also known as inspection rights or accounting rights) have a variety of proper uses and purposes for shareholders – here, the shareholders have sought books and records with respect to the Company’s compliance with opioid distribution controls, citing corporate wrongdoing as the relevant purpose.

For investors, one key issue in the case  is whether a shareholder seeking books and records must tell the company, up front, in effect ‘what they plan to do with the material’ – despite an inspection request being the start of an investigation rather than its terminus.

For more coverage on the Amerisource Bergen oral argument, check out the Law360 article [$$$] available here.

We will continue to cover inspection rights alongside other important rights available to investors, including appraisal rights, shareholder proposals and remedies for corporate misconduct.

The SEC has recently enacted rules that make it tougher for shareholders to submit ballot proposals.  As we previously blogged about, the rules now approved by the SEC by a 3-2 vote:  (1) increase the monetary amounts and length of investment required to submit shareholder proposals and (2) raise the threshold of shareholder support required to resubmit proposals previously voted down by shareholders.

In supporting the revised standards, SEC Commissioner Hester M. Peirce stated the changes “help to ensure that the shareholder-proponent’s interests are aligned with those of her fellow shareholders.”  However, opponents argue the new rules silence small investors with the monetary thresholds.

For larger investors, the more interesting (or perhaps, concerning) aspect is the change to resubmission thresholds – which now require that a proposal have received at least 5%, 15%, or 25% support, if voted on once, twice, or three times, respectively, in the past five years, or else the proposal will be barred from reconsideration for three years.  25% support is a significant increase from the prior threshold of 10%, as are the other thresholds, going from 3% to 5% and 6% to 15%, respectively.  This change may be relevant to activists as they build positions in companies and consider shareholder proposals.

We will continue to cover updates to shareholder proposals, as they are one of the important tools available to minority investors who seek to enforce corporate governance.

As our securities litigation practice group has spun off from our prior firm and formed our own new shop, we are excited to announce that The Appraisal Rights Litigation Blog we created years ago has now become the Valuation Litigation and Shareholder Rights Blog.  Along with the name change comes a new, broadened focus, consistent with our new firm’s goals.  This blog remains committed to bringing its readers informative, useful information about investor rights and valuation issues around the world, acting as a clearinghouse for information on court decisions, academic research, statutory changes, and providing a forum for guest authors to discuss investor rights and valuation issues from diverse fields and jurisdictions.

While our commitment to informative posts remains unwavering, a number of items have changes.  The new blog name reflects a broadened scope: appraisal litigation, at core, stands at the intersection of valuation disputes and shareholder rights.  With attorneys having more than 50 years of appraisal experience collectively, we have increasingly seen that appraisal issues are not confined solely to Delaware appraisal: appraisal decisions inform, and in turn are informed by, valuation decisions more generally.  Likewise, shareholder rights go well beyond appraisal, now often intersecting with shareholder inspection rights and other jurisprudence surrounding investor remedies.

Our broadened focus does not mean we will stop covering appraisal rights, indeed, appraisal rights remain a critical window both jurisprudentially and academically to operationalizing valuation issues and shareholder rights.  Instead, the blog will cover a broader swath of issues in valuation litigation and shareholder rights.  Regular readers may have already seen that the blog has covered shareholder inspection rights issues, voting rights issues, LLC issues, among others.  We intend to continue covering appraisal whenever we can, including significant decisions, research, statutory changes, or appraisal in non-US jurisdictions (eventually, aiming to have covered every country in the world), but that will be as part of an expanded look at valuation issues more broadly, including developments in fast-changing sectors, such as crypto, cannabis, and financial products.

Along with the change of name and focus is a change of firm.  We are thrilled to announce that this blog is brought to you by Rolnick Kramer Sadighi LLP, a premier securities litigation boutique focused on the investment management community.  All the founders and regular contributors of the previous Appraisal Rights Litigation blog have joined to form Rolnick Kramer Sadighi LLP, a firm built on the idea of partnering with clients to achieve exceptional results.   With the change in firm is also the ability to host more advanced content, including opinion and thought pieces in the areas of business valuation litigation and shareholder rights.

Finally, a new look.  Some changes to the look and feel of the blog have occurred as we have sought to modernize.  We fervently hope you will still find this a source of valuable information and useful insight.

~ The entire RKS Team

JPMorgan Asset Management released their 2020 proxy guidelines in April, and, like many other investors we have covered, the guidelines support appraisal rights. JPMorgan Asset Management’s guidelines even lay out the value of appraisal rights in a short sentence, providing:

G.  Appraisal Rights

Vote for proposals to restore, or provide shareholders with, rights of appraisal. Rights of appraisal provide shareholders who are not satisfied with the terms of certain corporate transactions the right to demand a judicial review in order to determine a fair value for their shares.