Dissenters Rights
Dissenters Rights statutes exist in some from in every state, and in the vast majority of the states protection is accorded by an appraisal remedy pursuant to which the dissenting shareholder is entitled to the "fair value" of his or her shares. Fair value for dissenters' rights purposes is simply defined as the value of the share immediately before the effectuation 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[1].
In a state that does not grant dissenters' rights for sales of assets, there is a serious gap in the shareholder's protection because an effect the same as a merger can be achieved by a sale of assets. For example, assume Corporation A sells its assets to Corporation B and as part of the deal B assumes A's obligations and A dissolves. Thereafter, Corporation A distributes the proceeds of the sale to its shareholders under its plan of dissolution. In reviewing these transactions some courts may determine that there has been a de facto merger, in which dissenters' rights under the merger statute are to be honoured. Two significant effects of so treating transactions so the procedural rights that accompany mergers apply are: The shareholders of the purchasing corporation will be entitled to vote on the transaction, and an appraisal remedy is available to all shareholders entitled to vote[2].
Arise of Dissenters' rights
Under California law, dissenters' rights arise whenever[3]:
- A plan of merger is submitted.
- Any exchange of shares between two companies is proposed ( if the member has voting rights).
- The LLC proposes to sell all or most of its assets outside of the ordinary conduct of its business.
- The LLC proposes to take any other action to which the articles or operating agreement attach dissenters' or appraisal rights.
If an LLC proposes any action to which dissenters' or appraisal rights apply, the notice to members noting the meeting's time, date, and place must also indicate that dissenters' rights are available. Upon receipt of this notice, a member must notify the LLC of his or her election to exercise dissenters' rights.
Requirements of Dissenters' notice
The holders of certificated shares that have been deposited and of uncertificated ones retain all other rights of a shareholders until these notice to those shareholders who complied with their notice requirements. This dissenters' notice must be sent no later than ten days after the corporate action was taken. The notice is to[4]:
- state where payment demand must be sent and when certificates for certificated shares must be deposited;
- inform shareholders who hold uncertificated shares of the extent to which share transfers will be restricted after payment demand is received;
- supply a form for demanding payment that includes the date of the first announcement to the news media or to the shareholders of the terms of the proposed corporate action and requires that the shareholders certify whether he acquired beneficial ownership of the shares before such date;
- set a date by which the payment demand must be received, which date may be not less than thirty nor more than sixty days after the date the dissenters' notice was delivered to shareholders.
Examples of Dissenters Rights
- The most common example of dissenters rights occurs when a shareholder disagrees with a proposed corporate action, such as a merger, sale of assets, or other corporate event. Under this scenario, the shareholder has the right to dissent from the action and demand to be paid the fair value of their shares.
- Another example of dissenters rights involves the adoption of a new corporate charter or by-laws. Under this scenario, a shareholder who disagrees with the proposed changes may dissent from the action and demand to be paid the fair value of their shares.
- A third example of dissenters rights occurs when a company is liquidated or dissolved. In this situation, shareholders who disagree with the decision to liquidate or dissolve the company may dissent and demand to be paid the fair value of their shares.
- Finally, a fourth example of dissenters rights involves a shareholder vote on a proposed corporate action. In this situation, a shareholder who disagrees with the proposed action may dissent from the vote and demand to be paid the fair value of their shares.
Advantages of Dissenters Rights
Dissenters Rights provide numerous advantages to shareholders, including:
- The ability to challenge and potentially block corporate actions that are not in the best interests of shareholders. This allows shareholders to have a voice in the decision-making process and provides a check against corporate abuse or mismanagement.
- The right to receive fair compensation for their shares in the event that the corporate action goes through. This ensures that shareholders are not unfairly disadvantaged by the corporate action, and that their interests are protected.
- The ability to hold corporate directors and officers accountable for their actions. This helps to ensure that corporate actions are in the best interests of all shareholders, and not just a select few.
- The right to receive information about the proposed corporate action. This allows shareholders to make an informed decision about whether or not to dissent, and ensures that they are fully informed about the potential consequences of their decision.
Limitations of Dissenters Rights
- One of the main limitations of dissenters rights is that the right is not absolute and only applies to certain defined corporate actions. The shareholder must demonstrate that they are entitled to dissenters rights and that the corporate action they are dissenting from falls within the definition of a qualifying corporate action.
- In addition, dissenters rights are only available to shareholders who are part of the corporation at the time the corporate action is taken. The rights do not extend to shareholders who become part of the corporation after the corporate action has been taken.
- A further limitation is that dissenters rights are time sensitive. In most states, a shareholder must exercise their dissenters rights within a specific period of time and failure to do so will result in the shareholder forfeiting their rights.
- Additionally, dissenters rights can only be used to dissent from specific corporate actions such as an amendment to the articles of incorporation, a merger, or a sale of assets. They do not extend to other types of corporate actions such as the adoption of a new business plan or a change in the management of the corporation.
- Finally, the right of a shareholder to dissent may be limited or even extinguished by contract. This means that shareholders may be required to sign a waiver of their dissenters rights in order to become a shareholder or to remain a shareholder.
- Negotiated Settlement: Alternatively, some states permit the dissenters and the corporation to negotiate a settlement between themselves. This approach ensures flexibility and allows the parties to come to an agreement outside of the court's parameters.
- Arbitration: In other instances, states may provide for the parties to enter into arbitration proceedings. This offers the advantage of a neutral third-party who is able to assess the merits of the case and make a decision.
- Mediation: Lastly, some states may provide for mediation proceedings, wherein a neutral third-party mediator attempts to facilitate a settlement between the parties. This offers the advantage of providing an extra measure of support in the negotiation process.
In sum, there are several approaches related to Dissenters Rights other than the appraisal remedy, including a negotiated settlement, arbitration, and mediation. These alternatives typically provide more flexibility and the ability to come to an agreement outside the court's parameters.
Footnotes
| Dissenters Rights — recommended articles |
| Vesting order — Written resolution — Pendente lite — Absolute assignment — Affirmative Covenant — Nominee shareholder — Proof of loss — Assignment of claims — Dissenters right |
References
- Cox J.D., Hazen T.L., (2003), Cox & Hazen on Corporations, Aspen Publishers, Chicago.
- Mann R.A., Roberts B.S., (2016), Business Law and the Regulation of Business, Cengage Learning, Brazil.
- Moscow C., Lesser M.R., (2000), Michigan Corporation Law & Practice, Aspen Publishers, New York.
- Spadaccini M., (2011), Ultimate LLC Compliance Guide, Entrepreneur Press, San Francisco.
Author: Aneta Szewczyk
