Appraisal rights: Overview, definition, and example
What are appraisal rights?
Appraisal rights give shareholders the ability to demand a fair valuation of their shares when a company undergoes a significant transaction, such as a merger or acquisition. If shareholders disagree with the price offered for their shares, they can exercise their appraisal rights to have an independent valuation determine the fair market value.
For example, if a company is acquired and minority shareholders believe the buyout price undervalues their shares, they can invoke appraisal rights to seek a court-determined fair price.
Why are appraisal rights important?
Appraisal rights protect minority shareholders from being forced to sell their shares at an unfair price in corporate transactions. Without these rights, majority shareholders or acquiring companies could undervalue shares, leaving minority shareholders with less than what their investment is worth.
For businesses, appraisal rights can impact mergers and acquisitions by increasing the risk of legal challenges if shareholders dispute the valuation. Understanding and addressing appraisal rights in corporate agreements can help avoid costly disputes.
Understanding appraisal rights through an example
Imagine a publicly traded company merges with a larger corporation. The acquiring company offers $50 per share, but some shareholders believe their shares are worth $60. Instead of accepting the offer, they invoke appraisal rights and petition a court or an independent valuation expert to assess the fair market value.
If the court determines that the fair price is indeed $60, the dissenting shareholders receive that amount instead of the original offer, ensuring they are compensated fairly.
An example of an appraisal rights clause
Here’s how an appraisal rights clause might appear in a corporate agreement:
“In the event of a merger, consolidation, or sale of substantially all assets of the Company, dissenting shareholders shall have the right to demand an independent appraisal of their shares pursuant to applicable corporate laws.”
Conclusion
Appraisal rights safeguard shareholders by allowing them to challenge the valuation of their shares in corporate transactions. They provide a legal mechanism for ensuring fair compensation and preventing undervaluation.For businesses involved in mergers or acquisitions, understanding appraisal rights is essential to managing shareholder expectations and avoiding legal disputes. If you’re a shareholder considering whether to exercise appraisal rights, reviewing the governing corporate laws and seeking expert valuation may be key steps in protecting your investment.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.