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While the decision in Egan is not binding precedent in Maryland, the court’s reasoning is supported by a plain reading of the statute.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