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While the decision in Egan is not binding precedent in Maryland, the court’s reasoning is supported by a plain reading of the statute.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.

In contrast to the United States, where an enabling legal regime and a fortunate confluence of a variety of factors have led to a surge of appraisal petitions and appraisal arbitrage, the appraisal remedy remains a sparingly utilized weapon in the arsenal of shareholders in the EU. Minority shareholders in the EU are reticent to exercise appraisal rights. One could plausibly argue that appraisal rights serve as a remedy of desperation for shareholders in the EU. The appraisal remedy is viewed as a last resort measure by shareholders. Furthermore, in cases where shareholders exercise their appraisal rights, their interventions tend to be incidental and ex post. Despite the fact that some U.S. hedge funds that are willing to use appraisal rights as part of their overall strategy are increasing their activities in the EU, a variety of factors, including a hostile legal regime, hinder the growth of appraisal and appraisal arbitrage in the EU.

In particular, the lack of harmonization of appraisal rights across EU Member States severely hampers their exercise. The European legislature has not yet introduced a U.S.-style general appraisal right with respect to fundamental corporate changes. Article 4(2) of the Cross-Borders Directive, which regulates cross-border mergers in the EU, allows but does not require Member States to adopt provisions designed to ensure protection for minority shareholders who have opposed the merger. The Directive is rather vague as to who qualifies as a minority shareholder, which company’s (surviving or disappearing entity) minority shareholders will receive protection, and the form of the protection. As a result, Member States’ rules regarding appraisal rights exhibit significant differences with respect to the events triggering appraisal rights, the form of appraisal rights, and the procedural requirements for exercising appraisal rights. Nevertheless, there is growing momentum for the introduction of harmonized appraisal rights in the context of cross-border mergers. The 2013 Study on the Application of the Cross-Border Mergers Directive identified the lack of harmonization regarding minority shareholder protection as an obstacle to cross-border merger activity. Following the 2012 EU Commission Action Plan on European Company Law and Corporate Governance, which announced that the Commission would consider amendments to improve the Cross-Border Mergers Directive, the Commission launched in 2014 a Consultation on Cross-Border Mergers and Divisions. The majority of respondents were in favor of harmonization of minority shareholder rights in connection with cross-border mergers. Their preferred method of harmonization was full harmonization. Most notably, proponents of harmonization considered the right to request compensation, namely appraisal rights, as the appropriate remedy.

Overall, investors have strongly voiced their concerns regarding the lack of harmonization in the context of cross-border mergers, arguing that multiple divergent legal regimes are an obstacle to cross-border deal activity. The divergence of legal rules imposes significant costs, introduces uncertainty, and can hinder the free movement of capital, one of the key elements in the EU single market. For a fuller discussion of EU appraisal, see Prof. Seretakis’s paper here.

** Lowenstein Sandler LLP thanks Professor Seretakis of Trinity University College Dublin for his contribution to this blog.  Professor Seretakis focuses on issues of law and finance in the EU.  His profile can be found here.  Lowenstein Sandler LLP does not practice law in the European Union.

*** The content of this post is contributed by Conyers Dill & Pearman’s Cayman Office.  We thank Ben Hobden, Erik Bodden and the entire Conyers team for their contribution.  Lowenstein Sandler does not practice in the Cayman Islands.

In In the matter of Trina Solar Limited*, the Grand Court had at first instance refused an interlocutory application made by a group of dissenting shareholders (the “Dissenters”) for worldwide freezing orders over the assets of the company in question pending the outcome of fair value appraisal proceedings, commenced pursuant to section 238 of the Cayman Islands Companies Law.  The Dissenters had applied to the Grand Court because the company had agreed to transfer many of its assets in its subsidiaries to other companies in China, ostensibly to progress the company’s post-merger restructuring. While the Dissenters had received an interim payment from the company following a separate application to the Grand Court, the Dissenters argued that the company’s actions would have the effect of significantly reducing the assets of the company so that it would ultimately be impossible for the company to satisfy in full any judgment of the Grand Court following the substantive trial.  The Grand Court declined to grant the injunction.

Unhappy with the Grand Court’s decision, the Dissenters took their case on to the Cayman Islands Court of Appeal (the “CICA”) which, while finding that the Dissenters had crossed the “jurisdictional threshold” so as to be entitled to ask for the grant of an injunction on the terms they had sought, determined that the company’s evidence had proved the transactions in question were not undertaken for less than proper consideration or on terms that were prejudicial to the company. Further, the fact that the company had made a provision for payment to the Dissenters, based on a realistic assessment of the company’s liability to the Dissenters, was enough to avoid the need for an injunction. The CICA held that the provision made by the company did not need to be for the full amount claimed by the Dissenters with reference to their expert advice, but a “reasonable and prudent provision” made after taking advice from legal and valuation advisers and with the company “forming a balanced and cautious view of the risks of the litigation”. No injunction was granted by the CICA, but the decision remains a helpful guide to companies facing similar litigation.

* CICA 26 of 2017 (unreported, 9 February 2018)

** The content of this post is contributed by Goodmans LLP of Toronto, Canada.  We thank Sheldon Freeman of Goodmans for this contribution.

In Canada, as in the U.S., shareholders are becoming increasingly interested in the use of “appraisal arbitrage” strategies in the context of certain M&A transactions.  While the circumstances and motivations for engaging in these strategies are quite similar on both sides of the border, there are numerous structural differences between Canadian and U.S. dissent and appraisal regimes that may affect the implementation of these strategies in Canada.  Goodmans LLP, one of Canada’s leading business law firms, recently summarized these differences in “The Use of Appraisal Arbitrage Strategies in Canada in Light of Dell” and points out the key legal issues to consider when engaging in or defending against an exercise of dissent rights.