Dissenters right

From CEOpedia | Management online

Dissenters right are part of a state corporate law that gives a corporation's shareholders the right to receive a cash payment for the fair value of their shares in an acquisition or merger they did not consent to.

Short history

In the past, mergers and acquisitions required a unanimous vote of all shareholders of the company. It wasn't easy to get. A single non-attached member could veto a merger or acquisition, even if it was best for the company. When the law on the rights of dissenting persons came into force, a single shareholder could no longer prevent a merger or acquisition on its own, but could instead choose to withdraw cash from its shares. If the majority of a company's shareholders approve the merger or consolidation, it will go forward, and the shareholders will be compensated. However, the shareholders who votes against the transaction aren't required to accept the terms of the dissenters’ rights. They can instead exercise appraisal rights, in which their shares before the merger are evaluated based on fair market price. Although dissenting rights have eased a number of the obstacles to a corporate transaction, they're still not without their hiccups. Under appraisal rights, a dissenting shareholder who objects to an extraordinary transaction (such as a merger or consolidation) may have his or her shares of the pre-merger or pre-consolidation corporation appraised (valued), and be paid the fair market value of his or her shares by the pre-merger or pre-consolidation corporation.Over the past three decades, the number of both dissenting shareholder appraisal rights claims and shareholder oppression claims increased significantly(L.H.Tran,I.V. Vrublevskaya 2015 p.8). This increase has created a demand for forensic-related business and security valuation services.

Fair value

Most states passed statutes allowing a shareholder to "dissent" from certain corporate transactions that change the fundamental nature of the business and to liquidate his shares for their "fair value"(B.Byrd 2015,p.2). The Georgia Code defines fair value as "the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action". This definition is remarkably circular, and there is almost no Georgia case law expanding the meaning of fair value.

The business valuation approaches and methods

Cases where the court takes into account the rights of different shareholders (L.H.Tran,I.V.Vrublevskaya 2015,p.13.):

  • The income approach discounted cash flow method - widely used to estimate fair value
  • The income approach direct capitalization method - often used to estimate fair value when long-term financial projections are not available,
  • The market approach guideline methods
  • The asset-based approach adjusted net asset value method or the asset accumulation method, which consider the going-concern value of the entity's assets (both tangible and intangible) less the current value of the entity's liabilities (both recorded and contingent).

Examples of Dissenters right

  • In the United States, shareholders in publicly traded companies have the right to dissent under the Delaware General Corporation Law. The right to dissent allows shareholders to receive the fair value of their shares when the company they are invested in is sold or merged without their consent.
  • In Canada, the Canada Business Corporations Act provides shareholders with the right to dissent in certain situations. Shareholders may dissent in the event of an amalgamation, a share exchange, a sale of assets, a share consolidation, or a plan of arrangement.
  • In the United Kingdom, the Companies Act 2006 provides shareholders with the right to dissent in the event of a takeover or merger of the company they are invested in. This right allows shareholders to receive the fair value of their shares when the company is sold without their consent.
  • In Australia, the Corporations Act 2001 provides shareholders with the right to dissent in the event of a takeover or merger of the company they are invested in. This right allows shareholders to receive the fair value of their shares when the company is sold without their consent.

Advantages of Dissenters right

Dissenters rights provide a number of advantages for shareholders in the event of an acquisition or merger. These include:

  • The ability to receive a fair cash payment for their shares in the event of a merger or acquisition that they did not consent to. This ensures shareholders can be compensated for the value of their shares, rather than be forced to accept whatever is offered by the acquiring company.
  • Shareholders can evaluate the offer and decide if it is in their best interest to accept it or not. This enables shareholders to have greater control over their investments and protect their rights as owners.
  • Dissenters rights provide an incentive for companies to make better offers when acquiring another company, as shareholders can choose to reject an offer if they deem it too low. This helps ensure that shareholders are properly compensated for their investment.
  • Lastly, dissenters rights provide an extra layer of protection to shareholders, ensuring that their rights are respected even in the event of a merger or acquisition.

Limitations of Dissenters right

Dissenters right can be a powerful tool for corporate shareholders, but there are some limitations to consider. These include:

  • The right is not available in all states, so shareholders should be aware of their state's laws before exercising the right.
  • Certain types of transactions may not qualify, such as stock splits, stock dividends, reverse stock splits, and reorganizations.
  • The right is only available to shareholders who have owned the stock for a certain period of time prior to the transaction.
  • In certain states, the shareholder must prove that the transaction is not in the best interests of the corporation.
  • The shareholder may be liable for the corporation's legal costs if the court finds the dissenters right invalid.
  • The shareholder may be forced to accept a cash payment for their shares at a discounted rate.
  • The shareholder may be subject to a court-ordered appraisal of their shares, which could result in a lower payment than expected.
  • The shareholder may be required to prove that the other party to the transaction was aware of the dissenters right when the transaction was made.

Other approaches related to Dissenters right

Dissenters right is just one of many approaches that can be used to protect shareholders' rights in an acquisition or merger situation. Other approaches include:

  • Appraisal Rights: This allows shareholders to challenge the sale price of their stock. They can do this by seeking an appraisal of the fair value of the stock, and if the appraisal value is higher than the sale price, they can receive the difference.
  • Voting Rights: Shareholders can vote on the acquisition or merger. This allows them to protect their interests in the company and potentially block the deal if they do not approve of it.
  • Rights of First Refusal: This gives shareholders the right to match any offer that is made for their shares. This ensures that shareholders are not taken advantage of, as they can keep their shares if they match the offered price.

In summary, Dissenters right is just one of many approaches that can be used to protect shareholders' rights in an acquisition or merger situation. Other approaches include appraisal rights, voting rights, and rights of first refusal.


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References

Author: Zofia Rey

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