Dissenters’ rights: Overview, definition, and example
What are dissenters' rights?
Dissenters' rights, also known as appraisal rights, are legal rights granted to shareholders who disagree with certain corporate actions, such as mergers, acquisitions, or significant changes to the structure of the company. These rights allow the dissenting shareholder to demand that the company buy back their shares at a fair value, rather than being forced to accept the terms of the action they oppose. Dissenters' rights are typically exercised in situations where shareholders feel that the proposed corporate action will not adequately compensate them for their investment or would negatively impact their rights as owners.
For example, if a company is being acquired by another business and a shareholder does not agree with the terms, the shareholder can invoke their dissenters' rights and request that the company repurchase their shares at an appraised value.
Why are dissenters' rights important?
Dissenters' rights are important because they protect shareholders from being forced into a decision that may not align with their best interests, particularly in situations involving mergers or acquisitions. These rights ensure that shareholders have an option to receive fair compensation for their shares, which is especially valuable when there is a significant change in ownership or control. Dissenters' rights promote fairness and provide a legal mechanism to resolve disputes over the valuation of shares or the terms of corporate actions.
Understanding dissenters' rights through an example
Let’s say a company announces a merger with a larger corporation, and as part of the deal, shareholders will receive stock in the acquiring company. One shareholder disagrees with the terms of the merger and believes the deal undervalues their shares. The shareholder invokes their dissenters' rights, requesting that the company buy back their shares at a fair appraised value, rather than accepting the merger’s offer. Through the appraisal process, the shareholder may be able to receive a higher price for their shares than the one offered in the merger.
In another example, a company decides to sell a large portion of its assets, and the shareholders are asked to vote on the decision. If a shareholder disagrees with the sale, they can exercise their dissenters' rights to demand that their shares be bought back at a fair value, instead of being forced to accept the terms of the sale.
An example of a dissenters' rights clause
Here’s how a dissenters' rights clause might appear in a corporate agreement or merger document:
“In the event that the proposed merger is approved by the Board and the Shareholders, any Shareholder who objects to the merger shall have the right to exercise dissenters' rights as provided by applicable law. The dissenting Shareholder may demand that the Company purchase their shares at an appraised value, as determined by an independent appraiser, in accordance with the procedures outlined in this Agreement.”
Conclusion
Dissenters' rights are an important tool for protecting the interests of minority shareholders who disagree with corporate decisions, such as mergers or acquisitions. By allowing dissenting shareholders to demand fair compensation for their shares, these rights ensure that shareholders are not forced into accepting decisions that could negatively affect their investments. Understanding dissenters' rights helps shareholders make informed decisions and provides a legal pathway for resolving disputes over corporate actions.
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.