Two recent high-profile shareholder rights cases in the Delaware Chancery Court have received a lot of attention due to the money that is at stake and the individuals in the disputes. These two cases, along with several other notable ones, have put a spotlight on how public and privately held companies need to be cautious in their valuations and actions.
Shareholder Rights to Dissent
Under the business corporation acts of most states, a range of fundamental corporate decisions must be approved by a shareholder vote. Those shareholders who vote against certain decisions are given the opportunity to assert what are called "dissenters' rights" or "appraisal rights." Most often the dissent occurs in the context of a merger of the corporation; however, there are a number of other decisions that can trigger the right to dissent.
These dissenters' rights allow for the dissenting shareholders to obtain a determination of the "fair value" for their interest and be paid that amount. The amount of the fair value is either negotiated with the controlling parties or determined by a court in what is known as an "appraisal proceeding."
The process generally involves the corporation having to present a value, which will likely result in the dissenter rejecting it. The value presented by the corporation may in certain jurisdictions have to be advanced by the corporation, while simultaneously earning interest during the time of the proceeding.
Shareholder dissent frequently revolves around the principle of rejecting the proposed value for their interest, which is oftentimes the case when presented with a company merger. The recent Delaware cases and some academic writing suggest that more issues could be occurring. In one shareholder rights lawsuit, Carl Ichan led an unsuccessful campaign to generate wide-scale dissent in the management buyout of Dell Inc. In another instance, hedge funds dissented in the buyout of Dole Food Company.
Trend Watch: Hedge Funds and Investors Potentially Benefit from Dissent
These shareholder rights disputes uncover an important trend. Lately, the Delaware courts have rejected the idea that the transaction value, even when negotiated, is determinative of "fair value." In Delaware and likely other states, the court has the unambiguous duty to independently determine fair value in a dissent matter. A negotiated transaction price may be a strong indicator of that value, but the appraisal process has the potential to result in a different valuation.
This ability to dissent and the subsequent appraisal process for fair value in a low-interest environment has created an opportunity. In turn, hedge funds and major investors that are dissenting or threatening dissent can seek higher prices along with earning interest on the ultimate price during the process – or even gain a potentially larger say with the board in the process of the contemplated transaction. In fact, it has been reported that hedge funds have been formed for the purpose of acquiring interests in companies in these types of transactions in order to dissent, negotiate better prices and earn a relatively high short-term interest return in the process.
Considerations for Private Companies
It is critical for private companies to review how a proposed transaction could trigger unintended consequences. A shareholder may have the right to dissent and have the ability to demand his or her shares be bought at a fair value. Liquidity and participation opportunity for the minority shareholders, even in transactions that may be seen as amicable and acceptable, need to be considered.
When dissenter rights are triggered in more tense transactions, the potential cost and benefits necessitate a deeper understanding of the concept of fair value. Fair value is not fair market value and is essentially a judicial concept with variations among the jurisdictions.
Sensitivity to the stability of the underlying corporation, liquidity concerns, trust company considerations and responsibilities call for a savvy shareholder rights attorney to assist with these highly technical action items.
Future shareholder rights posts will outline:
fair value considerations
challenges for various types of companies in shareholder dissent cases
liquidity concerns for majority shareholders and buyers