Dissenting shareholders: Overview, definition, and example
What are dissenting shareholders?
Dissenting shareholders are shareholders who disagree with a major decision made by the company, such as a merger, acquisition, or other significant corporate action. These shareholders typically exercise their right to object to the decision and may seek to have their shares bought out at a fair value. This process is commonly referred to as "dissenting" because these shareholders do not consent to the action and, instead, challenge it. In some jurisdictions, shareholders who dissent have the right to demand a judicial review or appraisal of the transaction to ensure they receive a fair price for their shares.
The right of dissent is often included in corporate governance laws to protect minority shareholders from being forced into unfavorable or disadvantageous corporate decisions.
Why are dissenting shareholders important?
Dissenting shareholders are important because they help ensure that the interests of minority shareholders are protected in situations where a majority vote or a significant corporate action could harm their financial interests. By providing a mechanism for shareholders to express disagreement and seek compensation, the law ensures that corporate decisions are fair and equitable.
For companies, it is essential to understand the rights of dissenting shareholders as part of their fiduciary duties to treat shareholders fairly. Allowing dissenting shareholders to challenge decisions or seek a buyout prevents abuse of power and helps maintain trust in the company’s decision-making processes.
Understanding dissenting shareholders through an example
Imagine a company is undergoing a merger with another company, and the board of directors has approved the transaction. However, a group of shareholders disagrees with the merger terms, believing that they are not receiving a fair price for their shares. These shareholders choose to dissent and demand an appraisal of their shares, seeking to be bought out at a price they consider more reasonable.
In another example, a publicly traded company proposes to sell a significant portion of its assets. While the majority of shareholders approve the sale, a few dissenting shareholders believe the sale price is too low. They exercise their right to dissent and demand that the company buy back their shares at an appraised value, which they feel better reflects the value of their investment.
Example of dissenting shareholders clause
Here’s how a dissenting shareholders clause might appear in a contract or agreement:
“In the event of a merger, acquisition, or any other corporate transaction, shareholders who dissent from the proposed action shall have the right to demand an appraisal of their shares. The company agrees to buy back the dissenting shareholders' shares at a fair value, as determined by an independent appraisal, in accordance with applicable law.”
Conclusion
Dissenting shareholders are those who object to significant corporate decisions, such as mergers or acquisitions, and seek to protect their interests by demanding a fair buyout of their shares. The ability to dissent provides an essential safeguard for minority shareholders, ensuring that their financial interests are not unfairly diminished by major corporate actions. Through this right, dissenting shareholders can challenge decisions they perceive as detrimental and seek a fair valuation of their holdings.
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.