No appraisal rights: Overview, definition, and example
What are no appraisal rights?
No appraisal rights refer to a provision in a contract or corporate transaction that eliminates a shareholder's ability to request an independent valuation (or "appraisal") of their shares in the event of certain corporate actions, such as mergers, acquisitions, or other significant changes to the company. Typically, in these situations, shareholders have the right to request an independent appraisal to determine the fair market value of their shares, but "no appraisal rights" means that shareholders forfeit this right and must accept the terms of the transaction as is.
For example, if a company is being acquired and the shareholders are offered a buyout price for their shares, those with "no appraisal rights" cannot challenge the buyout price by demanding an independent appraisal to argue for a higher value.
Why are no appraisal rights important?
No appraisal rights are important because they streamline corporate transactions by eliminating the need for an independent valuation process, which can be time-consuming and costly. For companies, this provision can simplify mergers, acquisitions, or reorganizations, allowing for smoother and quicker completion of the deal.
For shareholders, agreeing to "no appraisal rights" means they give up the opportunity to contest the offered price in an acquisition or merger. This can be seen as a disadvantage if shareholders believe the offer undervalues their shares. However, it may also be beneficial in situations where the terms are favorable, and shareholders do not want to engage in a prolonged dispute over valuation.
Understanding no appraisal rights through an example
Imagine a publicly traded company is being acquired by another company. The shareholders are offered $50 per share for their stock. However, the company’s charter includes a "no appraisal rights" provision, which means the shareholders cannot request an independent appraisal of their shares, even if they believe the fair value is higher than $50. In this case, shareholders must accept the buyout offer without the option to challenge it through an appraisal process.
In another example, a private company undergoes a reorganization that will involve the conversion of its shares into new shares or cash. If the company's governing documents include a "no appraisal rights" clause, the shareholders will not be able to request an independent evaluation of their shares' value before accepting the terms of the reorganization.
Example of no appraisal rights clause
Here’s how a no appraisal rights clause might look in a corporate agreement:
“In the event of a merger or acquisition involving the Company, the shareholders waive any right to request an independent appraisal of the value of their shares. The terms of the merger or acquisition will be final, and no shareholder shall be entitled to appraisal rights.”
Conclusion
"No appraisal rights" is a provision that eliminates a shareholder's ability to demand an independent valuation of their shares during certain corporate transactions, such as mergers or acquisitions. While this provision simplifies transactions for companies, it also means shareholders must accept the terms of the deal without contesting the share value. Understanding this clause is important for shareholders, as it affects their ability to challenge corporate decisions about the value of their investments.
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.