While Delaware isn’t the only state offering appraisal rights, not all of the remaining 49 states are appraisal-equal. New Jersey offers very little in terms of shareholder appraisal rights.
N.J.S.A. 14A:11-1 provides a general proposition that shareholders have a right to dissent from corporate actions, but then it enumerates several restrictions. Mirroring Delaware law, New Jersey law includes a market-out exception for mergers, denying shareholders appraisal rights if the shares are listed on a national exchange or held by 1,000 or more shareholders. N.J.S.A. 14A:11-1(a)(i)(A). Whereas Delaware has an exception to the exception allowing for appraisal for deals involving part or all cash, New Jersey’s market-out exception is absolute; it explicitly denies appraisal rights on deals where the shareholder receives cash, shares, or securities listed on a national exchange or held by more than 1,000 shareholders, or a combination of the two. N.J.S.A. 14A:11-1(a)(i)(B). New Jersey further provides that whether or not the holder possesses shares in the surviving corporation, there are no appraisal rights where the merger did not require a shareholder vote pursuant to law. N.J.S.A. 14A:11-1(a)(ii)-(iii). The law also disallows appraisal rights for substantial asset sales or exchanges not in the regular course of business that meet the same circumstances stated regarding mergers. N.J.S.A. 14A:11-1(1)(b). Like in Nevada, however, these are all default rules, and the certificate of incorporation can provide otherwise. N.J.S.A. 14A:11-1(4).
Of course, valuation–the cornerstone of appraisal–does not require an appraisal case to be critical. In Holiday Medical Center, Inc. v. Weisman, 2010 WL 5392840 (N.J. Sup. Ct. App. Div. Nov. 17, 2010), the Appellate Division dealt with the proper valuation of fair market value rather than appraisal rights in general. A 5 percent shareholder dissented from the sale of a nursing home for $8 million. The contracted sales price included $3,275,464.87 to pay off the existing mortgage, $2,895,060.45 would be returned to the purchaser as a charitable donation, and the company would ultimately net $2 million to be disbursed to the shareholders. The trial court appointed an independent appraiser that provided two different valuations for the facility: one was a going-concern value of $5.54 million, and the other had a liquidation value of $7 million. The trial court accepted the going-concern value as the proper way to value the facility, but it used this value instead to corroborate the $8 million total sale price, finding the value was based on a good-faith, arm’s-length transaction subject to the business judgment rule. Granting great deference to the trial court’s determination, the Appellate Division found no error in the trial court’s accepting the going-concern value as the proper way to determine the fair value or in the trial court’s relying on the contracted sales price to determine the fair value in this particular transaction. Further, the plaintiff shareholder had received only 80 percent of her expected share of the sales proceeds, and the company had since become insolvent. Once the trial court found the plaintiff was entitled to an additional $17,000, it also found she was entitled to pursue a constructive trust against the money from the sale distributed to the defendant directors of the company to recoup the balance of her interest.
Appraisal in New Jersey is available in limited instances, likely involving small, closely held companies, and one can expect New Jersey courts to apply systems of valuation like any other–even without an oft-used appraisal regime.
*** We thank Timothy Nichols, summer law clerk and student at Seton Hall Law School, for his contributions to this post.