STOCKHOLDERS' APPRAISAL RIGHTS IN M&A DEALS UNDER THE DELAWARE LAW
In the context of mergers and acquisitions ("M&A"), stockholders' appraisal rights (also known as "dissenters' rights") under the Delaware General Corporation Law ("DGCL") play a crucial role in safeguarding stockholders' interests. For the stockholder who disagrees with a corporate decision to effectuate certain mergers or certain other similar transactions, it is essential to understand Delaware's statutory scheme of appraisal rights and the interpretation of those rights by Delaware courts. For boards of directors and business owners, it is important to be aware of their implications in M&A transactions governed by the DGCL. This blog post aims to shed light on the significance of appraisal rights, the circumstances that trigger them, the procedural requirements, relevant provisions of the DGCL, potential remedies available to dissenting stockholders, and key considerations when navigating appraisal rights under the DGCL.
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What Are Appraisal Rights under the DGCL?
In general, appraisal rights (a/k/a dissenters' rights) under the DGCL grant a stockholder the right to an appraisal by the Delaware Court of Chancery of the fair value of the stockholder's shares of stock upon the occurrence of a merger or other similar transaction, subject to certain provisions. The DGCL also allows a corporation to choose to include a similar right for its stockholders in its certificate of incorporation for certain other specified, extraordinary events. The public policy behind these rights is the desire to give stockholders the ability to challenge the fairness of certain corporate actions. These rights provide an essential protection mechanism, allowing dissenting stockholders to express their disagreement with the proposed transaction and potentially receive fair compensation for their shares.
Triggering Appraisal Rights under the DGCL
The appraisal rights required under the DGCL are automatically triggered by various types of transactions, including 10 types of mergers, consolidations, and conversion specified in Section 262 of the DGCL. These transactions have the potential to significantly impact stockholders' interests, sometimes prompting dissenting stockholders to question the fairness of the transaction and invoke their appraisal rights under the DGCL.
It is worth highlighting that, unlike other states, Delaware does not provide for automatic appraisal rights upon the occurrence of the sale or lease of all or substantially all of a corporation's assets, or even amendments to the company charter that may tend to adversely affect the holders of any class or series of stock.
However, if a corporation has provided in its charter, Delaware law provides that such dissenters' rights may also be triggered in connection with amendments to the charter, mergers or consolidations for which appraisal rights are not otherwise mandated by the DGCL, the sale of all or substantially all of the assets of the corporation, and/or a conversion of the corporation into another type of business entity (e.g., an LLC).
Exercising Appraisal Rights under the DGCL
To exercise appraisal rights under the DGCL, stockholders must comply with the requirements outlined in Section 262. The dissenting stockholder need not vote against the proposed action, but must not have voted in favor. The stockholder must provide written demand for appraisal to the corporation before the vote. The stockholder must also continue to hold the shares that have appraisal rights through the date of the proposed transaction. Failure to adhere to these procedural requirements may result in the loss of appraisal rights.
The corporation also has obligations. If the transaction for which appraisal rights are available is submitted to a stockholder meeting for approval, then the corporation must give 20 or more days notice of the availability of the appraisal rights. Within 10 days after the merger closes, the surviving company has to notify all stockholders who submitted appraisal demands of the effective date of the merger or consolidation. If the merger is approved by certain permitted means other than at a stockholder meeting, the process is slightly different in some regards, but otherwise essentially the same.
The surviving company or any dissenting stockholder who has met the applicable requirements has a period of 120 days from the effective date of the merger or consolidation to initiate an appraisal proceeding. This is done by filing a petition in the Delaware Court of Chancery, seeking a determination of the value of the shares held by all the stockholders involved.
Appraisal Proceedings under the DGCL
The Delaware Court of Chancery is responsible for overseeing these appraisal proceedings, including determining which stockholders are entitled to appraisal rights. During the proceeding, the court will assess the fair value of the shares. By law, the court is supposed to consider "all relevant factors" when calculating the fair value. while excluding any value associated with the completion or anticipation of the merger. (However, in practice, the court has often not adhered to that latter restriction.) Additionally, the court will determine if any interest should be paid on the determined fair value. Unless the Court of Chancery decides otherwise, interest is compounded quarterly and accrues at a rate of 5% over the Federal Reserve discount rate (including any surcharges. If interest is to be paid, it will generally accrue from the effective date of the transaction until the judgment is paid. The costs of the proceeding may be determined by the court and taxed upon the parties as the court deems equitable in the circumstances, subject to a conditional right for the court to charge all or a portion of the costs against the shares entitled to appraisal.
Additional Provisions of the DGCL
While Section 262 primarily governs appraisal rights, other provisions of the DGCL may also be relevant in the context of M&A deals. For example, several sections outline the requirements for various transactions for which dissenters rights are available, including the approval process by the stockholders, while Section 228 covers the procedures for taking stockholder actions by written consent.
Benefits and Considerations
Appraisal rights under the DGCL provide important benefits for stockholders. They ensure that dissenting stockholders have a voice in corporate decision-making, protect against potential undervaluation, and promote fairness in mergers and other M&A transactions. However, exercising appraisal rights under the DGCL involves compliance with specific procedural requirements, understanding the intricacies of appraisal proceedings, and navigating the relevant provisions of the DGCL. Engaging an experienced corporate lawyer well-versed in the DGCL is crucial to effectively protect dissenting stockholders' interests and maximize the chances of a successful outcome.
TAKEAWAY
In the realm of mergers and acquisitions governed by the DGCL, appraisal rights, commonly known as dissenters' rights, serve as a powerful mechanism to protect stockholders' interests. By understanding and exercising these rights, dissenting stockholders can challenge the fairness of proposed transactions and potentially secure fair compensation for their shares. Corporate lawyers specializing in the DGCL play a vital role in guiding stockholders through the process, ensuring compliance with relevant provisions of the DGCL, and advocating for their clients' best interests. Upholding appraisal rights under the DGCL contributes to the integrity and fairness of M&A transactions, fostering investor confidence and trust in the Delaware corporate governance framework.
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