Definition
Appraisal rights are a shareholder’s statutory right or contractual right to demand a fair valuation and to receive cash payment for their shares after certain corporate actions, such as a merger or acquisition. It is a protection mechanism for minority shareholders when they may disagree with the proposed event’s terms. The procedure for exercising these rights is usually stipulated by the law of the country in which the company is incorporated.
Key Takeaways
- Appraisal Rights are the legal rights of a shareholder to oppose a certain action taken by the corporation. He/she has the right to demand a judicial evaluation of the worth of his/her shares during the event that the company is undergoing restructuring or merging.
- These rights provide investors with protection against the company taking actions that might significantly change the value of their shares or result in unfair terms, offering them the possibility to get a fair cash value for their shares.
- This right involves a complex process that includes a formal demand for appraisal, a judicial proceeding, court appraisals to determine fair value, and delay in receiving any merger consideration. Therefore, investors must weigh the costs and benefits before invoking their appraisal rights.
Importance
Appraisal rights are of significant importance in the finance world because they protect minority shareholders’ interests.
This legal right is provided to shareholders who do not agree with certain corporate actions, primarily mergers or acquisitions, to request court assessment of the fair value of their shares.
Without such rights, minority shareholders may risk losing their fair share against their wishes or getting pressured into unfair buyouts.
With appraisal rights, these shareholders can resist under-priced offers, assert their interests, and ultimately either retain their investment on fair grounds or exit the investment at a court-determined fair value, thus ensuring equitable treatment in corporate finance.
Explanation
Appraisal rights play a vital role in the world of corporate finance, particularly in transactions such as mergers, acquisitions or significant asset disposals which may dramatically shape the future of a company. The main purpose of these rights is to protect minority shareholders in the event that a company’s board of directors pursues a course of action that they disagree with.
They give minority shareholders, who might otherwise feel marginalized in the decision-making process, a real say in the direction the company takes by giving them the power to challenge decisions. Specifically, appraisal rights allow shareholders to demand judicial determination of the fair value of their shares if they are dissatisfied with the buyout price at times of certain major corporate transitions.
In other words, shareholders have the right to have their shares independently valued and to receive payment reflecting that valuation from the company. This mechanism provides a pragmatic solution to scenarios where minority shareholders feel that they are being prejudiced by majority shareholders or the board in a significant transaction, ensuring equitable treatment and fair value return for all shareholders.
Examples of Appraisal Rights
Dell Case (2013): Dell Inc. decided to go private in
However, a number of shareholders did not agree with the valuation set for the shares to be sold, believing their investment was undervalued. They exercised their appraisal rights, resulting in a lawsuit. The court ultimately concluded that the fair value of the shares was higher than the deal’s price, benefiting the dissenting shareholders.
Aeroflex Case (2014): Shareholders of Aeroflex Holding Corp. exercised their appraisal rights when the firm was acquired by Cobham plc. Dissenting shareholders believed the sale price undervalued their investment. After exercising their appraisal rights, the Delaware Court ruled in their favor, setting a higher valuation on their shares than what was initially offered.
DFC Global Corp (2017): This is yet another example where shareholders exercised their appraisal rights when the payday loan company DFC was acquired by a private equity firm. The shareholders disagreed with the purchase price and initiated an appraisal right proceeding. The Delaware Supreme Court ruled that the deal price was the best evidence of fair value, thereby denying an increase. This case was significant as it set the precedent that deal price can be considered as the market price in appraisal rights cases.
FAQ – Appraisal Rights
1. What are Appraisal Rights?
Appraisal rights grant shareholders the right to demand the fair payment, from the company, for their shares in scenarios such as mergers, consolidations, or the sale of all or virtually all of the assets of a corporation, often through a formal legal process.
2. When can shareholders exercise Appraisal Rights?
Shareholders can exercise appraisal rights when a corporation is undergoing significant transformations like mergers, consolidations, or asset sales. However, it’s necessary to consult the company’s bylaws or charter and local laws to ensure these rights are available and to understand their specific terms.
3. What are the benefits of Appraisal Rights?
Appraisal rights protect minority shareholders from possible unfair treatment. By using these rights, shareholders can ensure they receive a fair price for their shares, especially if they believe the company’s actions might devalue their share.
4. What is the process to exercise Appraisal Rights?
Firstly, a shareholder must have continuously held the shares up to the date of the corporate action. Then, the shareholder must give written notice to the company before the shareholder votes occur, specifying their intention to demand payment. Finally, if the corporate action is approved, the shareholder must submit their shares for appraisal and payment. However, procedures vary by jurisdiction and company.
5. Can all shareholders exercise Appraisal Rights?
Not all shareholders can exercise appraisal rights. In general, these rights are available to the registered holders of shares. Also, in some jurisdictions, these rights are not available to shareholders who vote in favor of the proposed corporate action.
Related Entrepreneurship Terms
- Fair Market Value: This is the reasonable price at which a property or asset would be sold in a fair transaction between two knowledgeable and willing parties.
- Shareholder Rights: These are the privileges given to shareholders, which include voting rights and the right to receive dividends or proceeds from the liquidation of a company.
- Dissenter’s Rights: This refers to a shareholder’s right to disagree with a significant corporate decision, such as merger, acquisition, or sale of assets. The dissenter can exercise their appraisal rights and demand that the corporation buy back their shares at a fair value.
- Merger and Acquisition (M&A): These are corporate strategies involving the unification of different companies to increase their economic efficiency and gain market advantages. The appraisal rights often relate to M&A decisions.
- Corporate Governance: This is the system of rules, practices, and processes by which a company is directed and controlled. It greatly affects the appraisal rights of shareholders.
Sources for More Information
- Investopedia: This is an American financial website that provides investment dictionaries, advice, reviews, ratings, and comparisons of financial products such as brokerage accounts.
- Legal Information Institute (Cornell University Law School): This offers a comprehensive library of the legal system, laws, and legal terms including information on appraisal rights.
- Harvard Law School Forum on Corporate Governance: Here, appraisal rights are often the topic of legal studies, articles, and research papers by top legal scholars.
- U.S. Securities and Exchange Commission: The SEC is the authority that regulates the securities industry in the United States, including issues of corporate governance and rights of shareholders, such as appraisal rights.
