Does increased appraisal risk have an effect on manager behavior?  Recent research (unpublished) suggests it does.

In this paper (earlier version), the author examines target manager disclosure behavior before and after the significant Transkaryotic decision.  Reviewing mergers before and after that merger, the returns, abnormal returns, and associated disclosures by target management, the author concludes that “target managers’ disclosure strategies respond to increased appraisal risk.”  They find that “at-risk target managers significantly alter their disclosure behavior after the [Transkaryotic] ruling in that they strategically withhold good news to reduce the threat of appraisal during mergers.”  The author also documents and suggests that this “is driven by those target firms whose managers have future economic ties with the acquiring firm, and that acquirers benefit from these ties in the form of a lower likelihood of an appraisal lawsuit and higher post-merger returns after the ruling.”

In a reminder to all investors, the author suggests the importance of further work on target managers’ person incentives, considering the role that those incentives play in “determining the disclosure strategies of their firms during mergers and acquisitions.” Leaving the door open for much-needed research, the author suggest that further study could review whether and how “target CEO retention can assist acquirers in mitigating appraisal risk in Delaware mergers” and how “target CEO-acquirer ties might influence target firm disclosure strategies that benefit acquirers in other meaningful ways in the takeover market.”  Unsurprisingly, the benefits to acquirers often come in part in the form of lower deal premia and lower returns to shareholders.

This work continues the numerous pieces of research showing appraisal, and the exercise of a robust appraisal “check” is good for investors and for the market.

In April, the North Carolina Business Court issued a decision in an appraisal case stemming out of Reynolds American’s 2017 merger with British American Tobacco.  The court ultimately awarded deal price.  The Buyer was a 42% shareholder but did not control the Company.  The Seller conducted no auction or market check.  The Court ultimately deferred to the price negotiated by a Special Committee, citing certain decisions interpreting both North Carolina and Delaware law.  See the decision here.*

*RKS attorneys serve as counsel to dissenters in this matter.

Business Law Today previously posted this piece discussing key Delaware General Corporate Law differences between merger, conversions and domestications.  A sometimes forgotten reason for a merger or other major corporate action is to change the jurisdiction of incorporation and thus, usually, the regulatory or tax regime associated with it.  Mergers effectuated even for this purpose may carry appraisal rights if they trigger DGCL 262.  But a merger is not the only way of changing jurisdictions, as the article notes.  Conversions and domestications offer an alternative path to the same result.

And why no appraisal rights, even when such a change may be very significant and of interest to a minority shareholder?  Perhaps because, as we have covered before, the history of appraisal was an outgrowth of the death of unanimous consent provisions.  But conversions and domestications, under the DGCL still require unanimous stockholder consent – making an appraisal concept superfluous.

For completeness, its worth noting that this piece discusses the rights associated with Delaware law; an interested party would be advised to also check the law of the jurisdiction the company is entering (or leaving) if not Delaware.  As we’ve seen before, surprising appraisal rules remain in some places.

We previously wrote about the Interoil decision, where the Yukon Court of Appeal overturned a decision applying a discounted cash flow analysis to a Canadian appraisal proceeding, holding that the trial court failed to give proper consideration of merger price. Discussion of the Interoil decision has been significant among Canadian and international law firms, including pieces discussing:

We’ve previously written about how appraisal rights are a factor considered by deal-makers during the merger process, as well as by in-house counsel and other professionals involved in mergers: but are appraisal rights part of the decision-process when deciding where to incorporate?  Perhaps they should be, as one writer has compared the appraisal regimes in Delaware and Florida, comparing and contrasting the two regimes with an eye towards those deciding between Delaware and Florida as a place of incorporation.

The author’s main observation is that appraisal in Florida is available in “more circumstances” than Delaware, though we would also note that Delaware has the most extensive corpus of law on issues of appraisal in not only the US but, likely, in the world.

Should a founder consider appraisal when deicing where to incorporate?  As we’ve urged before, appraisal rights should – and do – matter to investors, and thus any founder thinking about raising capital in the future should consider appraisal at founding as well.

As COVID-19 continues to cause uncertainty in M&A transactions, investors should have a heightened interest in pursuing the rights available to them, including appraisal and inspection rights.

For instance, the Harvard Law Forum expects that buyers who agreed on transaction terms at pre-COVID-19 valuations might seek to terminate those transactions or renegotiate the price point prior to closing, and attempt to do so without incurring liability.  While the seller may try to force the buyer to close, if unsuccessful, investors of the selling corporation might want to consider pursuing their shareholder rights, such as their right to appraisal.

As we’ve blogged about before, appraisal can be a viable protection for shareholder interests and rights during times of financial crisis.

In Illinois, a shareholder has the right to dissent from certain corporate actions such as a merger, sale of substantially all of the company’s assets or organizational changes that materially and adversely affect shareholder rights. 805 ILCS 5/11.65(a). A corporation that takes an action giving rise to the right to dissent must provide shareholders with a statement of value of the company’s shares in addition to certain corporate financial statements.  805 ILCS 5/11.70(a).

If a shareholder disagrees with the company’s valuation, he or she must submit his or her own estimate of the fair value of company shares. 805 ILCS 5/11.70(e). Assuming the corporation disputes the dissenting shareholder’s valuation, the corporation must file a petition in the circuit court where its registered office is located “requesting the court to determine the fair value of the shares and interest due.” 805 ILCS 5/11.70(f).

“Fair value,” with respect to a dissenter’s shares, “means the proportionate interest of the shareholder in the corporation . . . immediately before the consummation of the corporate action to which the dissenter objects excluding any appreciation or depreciation in anticipation of the corporate action, unless exclusion would be inequitable.”  805 ILCS 5/11.70(j)(1). “Fair value” is calculated “without discount for minority status or, absent extraordinary circumstance, lack of marketability.” Id.

Although the statute defines “fair value,” reviewing courts interpreting this provision have observed that “there is no precise formula for valuing the stock in a corporation, and a trial court is to consider ‘[e]very relevant evidential fact and circumstance entering into the value of the corporate property and reflecting itself in the worth’ of a dissenter’s shares.” Brynwood Co. v. Schweisberger, 913 N.E.2d 150, 162 (2d Dist. 2009) (quoting Stewart v. D.J. Stewart & Co., 37 Ill.App.3d 848, 853, 346 N.E.2d 475 (1976).) Illinois courts have found that a relevant factor can be “anything that might impact on the stock’s intrinsic value.” Id. Those factors include the stock’s market price, the corporation’s earning capacity, the investment value of the shares, the nature of the business and its history, the economic outlook of the business and the industry, the book value of the corporation, the corporation’s dividend paying capacity, and the market price of stock of similar businesses in the industry. Id. Further, while the statute defines “fair value” to eliminate the marketability and minority discounts typically associated with “fair market value” valuations, courts in Illinois have found that “fair market value” is a relevant factor to be considered when determining “fair value.” Id. (citing Weigel Broadcasting Co. v. Smith, 682 N.E.2d 745 (Ill. App. Ct., 1st Dist. 1996)

Thus, a pivotal question in a valuation proceeding is: After accounting for the unique nature and history of the corporation and its business, what was the intrinsic or inherent value of the company as a going concern on the day before corporate action from which the dissenter objected? Id. at 166. So, for example, in Brynwood, 913 N.E.2d at 162, the majority of shareholders voted to sell the company’s sole asset, a commercial office building. The dissenting shareholder argued that the value of his shares should be calculated without regard to capital gains taxes, closing costs or professional fees associated with the sale because these costs were incurred after the company decided to sell. Id. at 163-64. The trial court generally agreed and determined the fair value of the dissenting shareholder’s shares without deducting capital gains taxes or other costs. Id. at 161.

The Appellate Court of Illinois reversed, finding that when determining “fair value” courts should consider investment or other costs that are reasonably foreseeable when monetizing corporate shares. Id. at 163. Taxes and closing costs/fees were foreseeable and would have to be accounted for in valuing company shares. To do otherwise would inequitably treat the dissenting shareholder more favorably than non-dissenting shareholders. Id. at 165 (citing Rainforest Café, Inc. v. State of Wisconsin Investment Board, 677 N.W.2d 443, 450 (Minn.App.2004) and observing that courts valuing company shares must do so equitably).

Novack and Macey LLP handles all varieties of intra-entity disputes. As a leading litigation firm in Illinois, Novack and Macey is able to provide seamless advice on appraisal rights, valuation disputes and other business disputes in Illinois and nationwide.

*RKS thanks Andrew D. Campbell of Novack and Macey LLP for his contributions to this blog.


  • Appraisal rights are a novel concept which were introduced into our law in 2019 through the Companies and Other Business Entities Act (Chapter
  • The Act became effective on the 14th of February 2020.
  • Fair value remains an unsettled concept under the law and case law will have to develop it.
  • Appraisal rights have been introduced to protect minority shareholders in companies.

Main Article

The new Companies and Other Business Entities Act[1]( The New Act) was gazetted on the 15th of November 2019 and comes into effect in February 2020. It repeals the Companies Act and the Private Business Corporations Act. This new law amongst other changes has introduced appraisal rights, a development aimed at the protection of minority shareholder rights. This short article  navigates  the statutory measures brought about by the New Act and their effectiveness in the protection of minority shareholders if any or are merely cosmetic in nature.

It is a trite principal of our law that companies are democratic institutions in which the majority shareholders subject the minority shareholders to their whims and caprices. It should be further highlighted that the minority shareholders have no voice in the management of the company as majority shareholders are entitled to act in a way that advances their own interests leaving the minority shareholders exposed. In light of the differences in the powers of the parties involved, the New Act introduced a raft of measures to deal with this misnomer. This short article  navigates  the statutory measures brought about by the New Act and their effectiveness in the protection of minority shareholders if any. It is pertinent to note that prior to the enactment of the New Act, the majority rule principle applied. The advent of the appraisal remedy in Zimbabwean company law was a welcome development that resulted in more equitable measures for the protection of a minority shareholder rights.[2]

As early as 2014, the Law Development Commission of Zimbabwe started public processes to review the then Companies Act which had been promulgated in 1951. The new Act has brought about changes to develop protection of minority shareholders through the promulgation of section 233. It is important to highlight that these developments had their origins in the policy paper by the Law Development Commission which stated among a number of reasons the need to bring the law into accord with current and international trends.

It is a public secret that most jurisdictions had introduced appraisal rights into their company law with our neighbours South African promulgating their Companies Act 71 of 2008 which introduced these rights. The policy paper emphasised the importance of having effective remedies meant to enable shareholders and investors to exercise their basic rights. In particular, the paper stated that exit and appraisal rights should be identified and given content, to provide smaller investors the ability to make informed choices where they are unable to influence company direction and decisions effectively or to pursue private actions against the company in civil courts. The appraisal remedy in section 233 of the New Act  is the result of this particular recommendation.

The appraisal remedy provides that a shareholder can compel a company to buy back his /her shares for fair value in  transactions which are espoused under section 143 and 228 of the New Act vis being variation of share rights and mergers. However the issue of fair value is not clearly defined in the Act and the lack of a definition is likely to result  in disputes on the interpretation of this term and the effectiveness of the appraisal remedy is likely to be diluted by the lack of a statutory definition. The Appraisal remedy is triggered when a company undertakes any of the fundamental transactions under section 143 and 228 of the New Act and this has improved on the ability of a shareholder to obtain relief against unacceptable behaviour by other shareholders and directors.

It is important not to overemphasize the purpose of these rights  but save to highlight that it will seek to expose the fact that the unbridled application of the rule in Fose v Harbottle[i] would be harsh and unjust and directors by virtue of their position may act outside of the best interests of the company and minority shareholders need protection in order to minimise the risk of asset expropriation. The genesis of the  appraisal remedy is therefore significant in that it may substantially influence the manner in which a dissenting shareholder’s shares are valued by the court in appraisal proceedings.

In order for one to exercise the rights under section 233 ,one must understand the triggering events of these rights under section 143 and section 228 of the New Act. It therefore follows that if one of the two trigger events occurs then the Company must address a notice to the affected shareholder outlining his/her rights under section 233 . Appraisal rights alter the majority rule by allowing the majority shareholders the flexibility to effect fundamental changes to the company but at the same time allowing dissenting shareholders to realize their shareholding if they disapprove of the resolution approving the fundamental change. Under these circumstances, the appraisal remedy`s purpose can be said to be one of providing the option of liquidity to dissenting shareholders.

Alternatively, the appraisal remedy provides a means to make sure that protection is offered to minority shareholders more particularly in situations where there is acquisition of the minority shareholders` shares for a cash consideration. When a fundamental transaction such as a merger as contemplated in section 228 of the Act is being transacted, minority shareholders can rely on the appraisal remedy if they believe that the transaction negatively affects their interests in the company. This calls upon the management and the majority shareholders to try and reach a reasonable consideration for the fair value of the shares before they resolute on a fundamental transaction lest they risk having to buy out dissatisfied minority shareholders.

The decision by minority shareholders to liquidate their shareholding in response to a triggering action may cripple the finances of the company especially when the proportion of the dissenting shareholders is relatively large. In this regard the appraisal right acts as an exit right and may deter majority shareholders or the board of directors from oppressing minority shareholders. The above discussion shows that these appraisal rights are a necessity under our Company Law and therefore their introduction will bring about change in the way minority shareholders are treated in the running of a business.

As discussed  above, an appraisal right is not an automatic right. A minority shareholder who wishes to exercise this right will only do so if his company takes any of the triggering actions in terms of section 143 and section 228  of the New Act. In terms of section 143(1), after meeting the procedural requirements, appraisal rights will only accrue to a person if the company takes any of the triggering actions bringing about variation in rights of shares held by a particular individual.

Section 143 (1)  of the New Act provides, as the first action, that when a company notifies shareholders of a meeting to alter the Memorandum of Incorporation to change the rights of shares, which alteration has the effect of adversely and materially affecting the rights and interests of the shareholders in question, that will trigger the appraisal remedy.

When a triggering action exists, and a minority shareholder wishes to be bought out of the company, there are certain procedural prerequisites to be followed. A dissenting shareholder will have to give the company a written notice objecting to a resolution to be voted on. If the resolution is adopted anyway, the company must notify the dissenting shareholder of same within ten days. The dissenting shareholder may then make a demand that a fair value of all the shares that he holds in the company be paid to him. The company has the responsibility to send a written offer to each dissenting shareholder within five days. The offer letter will be disclosing the amount that has been considered as a fair value by the board of directors. If the dissenting shareholder is gratified by the offer and considers the value attached to the shares fair then he is entitled to be paid by the company within ten days.

In circumstances where the dissenting shareholder considers the shares to be undervalued he may make an application to the court for consideration of a fair value of the shares in question in terms of section 233(14) of the New Act. If there are other dissatisfied shareholders besides the one making the application, they must be joined as parties to the application and the decision of the court is binding on them. When considering the application, the court must determine a fair value in respect of the shares of all dissenting shareholders. Because of the technical nature of the application, the court may use its discretion to appoint an appraiser or appraisers to assist in the determination of a fair value. The court may also allow a reasonable interest rate payable for the period between the resolution giving rise to the application and the date of payment. An appropriate order as to costs of litigation may also be made by the court at its discretion.

Dissenting shareholders must follow this procedure before they exercise their right to be bought out of the company. Though the appraisal remedy can be commended as a positive development in Zimbabwean company law especially in the protection of minority shareholders, the procedural requirements may be regarded as a drawback in the protection of minority shareholders. The procedure is time consuming and it makes appraisal rights hard to enforce. It has been argued by several scholars that the appraisal remedy has not been extensively utilized in jurisdictions where it has been long established because of inter alia, the fact that it is time consuming and that could again affect the effectiveness of these rights.

However in order to maintain the objective of the appraisal remedy there is need to regulate the process and protect it from abuse by minority shareholders. There is also need to deal with the lack of clarity on the determination of fair value as defined in terms of  the New Act. The lack of clarity thereby undermines the effectiveness of the remedy thereby leading to underutilisation given the uncertainty of the outcome based on lack of particularity on the term fair value. However, the history in other jurisdictions has shown that appraisal rights are underutilized and there is a lack of a body of precedent on the issue which explains why some shareholders will be hesitant to pursue the rights when the opportunity comes due to the uncertainty.

Nyasha Brighton Munyuru is a holder of an LLB (Hons) Law Degree from the University of Zimbabwe (UZ) and Master of Laws ( LLM ) in Corporate Law from the University of South Africa. He is also the Managing Partner and Head of Corporate Law Department at one of the leading law firms in Harare, Muvingi and Mugadza Legal Practitioners a member of the Alliott Group which is an independent alliance of accounting, law and consulting firms. Nyasha is a Registered Legal Practitioner, Conveyancer and Notary Public (High Court of Zimbabwe and a member of the Law Society of Zimbabwe and International Bar Association (UK) with 10 years’ experience. Nyasha has substantive business litigation experience, with a keen focus on banking and financial services, he has represented commercial institutions, investment companies and other clients in complex financial transactions. Nyasha’s litigation experience includes all aspects of arbitration, mediation and conciliation on commercial disputes. Having advised a number of corporate organisations, Nyasha draws praise for his smooth handling of complex issues. Nyasha practice covers diverse commercial matters as well as preparation of various commercial agreements. His reliable and dedicated nature serves as an important point of contact for clients as Nyasha heads the firm’s Corporate Law Department.

*RKS thanks Nyasha Brighton Munyuru, Managing Partner, Muvingi & Mugadza Legal Practitioners, for his contributions to this blog.

[1] (Chapter 24:31)

[2] Section 233  of the Companies and Other Business Entities Act

[i] (1842) 2 Hare 460, 67, ER 189.

Per JDSupra, the Yukon Court of Appeal overturned a decision applying a discounted cash flow analysis to a Canadian appraisal proceeding, holding that the trial court failed to give proper consideration of merger price. Citing factors that would be familiar to a US practitioner, including the deal process, the existence (or lack thereof) of other higher bids, and the apparent sophistication of the investor base, the Court found that merger price was more reliable than the DCF calculations put forward by the parties. As we have covered before, Dell and its progeny have had reverberations in Canada, and this case fits with the overall trend that Court’s will review process when considering whether and how to weigh merger price in an appraisal proceeding.