Dissenting shares: Overview, definition, and example
What are dissenting shares?
Dissenting shares refer to shares held by shareholders who do not agree with certain actions or decisions made by a company, such as a merger, acquisition, or significant corporate restructuring. When shareholders dissent, they can exercise their right to oppose the proposed transaction and seek to have their shares bought back at a fair value, often through a legal remedy known as appraisal rights.
Dissenting shareholders typically disagree with the terms of a merger or acquisition, believing the value offered for their shares is insufficient or not in their best interests. In such cases, the dissenting shareholders may be entitled to demand that the company buy back their shares at a price determined by an independent appraisal, instead of accepting the terms of the merger or acquisition.
Why are dissenting shares important?
Dissenting shares are important because they protect minority shareholders who may feel that the company’s decisions do not align with their interests, especially in situations where they believe they are not receiving adequate compensation for their shares. The right to dissent allows shareholders to exit the company in a way that reflects the true value of their ownership.
For businesses, managing dissenting shareholders is crucial, as it can affect the completion of mergers, acquisitions, or restructurings. Companies need to be aware of appraisal rights and the potential cost of buying out dissenting shareholders at a fair market value.
Understanding dissenting shares through an example
Imagine a publicly traded company is in the process of being acquired by a larger corporation. The shareholders of the company are voting on whether to approve the acquisition. While most shareholders agree to the terms, a small group of shareholders disagrees with the price being offered for their shares and does not believe the acquisition is in their best interest. These shareholders exercise their dissenting rights and demand that the company buy back their shares at a fair value, as determined by an independent appraisal. This allows them to exit the company without being forced to accept the terms of the acquisition.
In another example, a shareholder of a privately held company is opposed to a major merger that they believe undervalues the company. The shareholder decides to exercise their appraisal rights and request a buyout of their dissenting shares, arguing for a higher price based on an independent valuation of the company.
An example of a dissenting shares clause
Here’s how a dissenting shares clause might look in a merger or acquisition agreement:
“In the event that a shareholder dissents from the proposed merger, the Company shall provide the dissenting shareholder with the opportunity to exercise their appraisal rights under applicable law. The Company shall repurchase the dissenting shares at a price determined by an independent appraisal, which will reflect the fair value of the shares as of the effective date of the merger. Dissenting shareholders must notify the Company of their intention to dissent and comply with the required procedures to exercise their appraisal rights.”
Conclusion
Dissenting shares serve as a safeguard for shareholders who disagree with corporate decisions that they believe do not reflect the value of their investments. The right to dissent and seek a fair buyout ensures that minority shareholders can exit under fair terms during events like mergers or acquisitions. For companies, handling dissenting shareholders and the potential for appraisal claims is an important aspect of corporate governance, requiring careful management to ensure fair treatment of all shareholders while executing major corporate decisions.
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.