What are appraisal rights?

Posted on: Aug 16, 2016

What are appraisal rights?

Appraisal rights entitle shareholders of a target corporation to a determination of the fair value of their stock by a judicial proceeding or independent valuation, and obligate the acquiring corporation to purchase the shares at that determined value. For example, when an investor believes the value of his or her shares exceeds the amount being offered in a merger or consolidation, he or she can exercise appraisal and have the shares’ worth determined and awarded by a judge. Appraisal rights exist in transactions involving some amount of cash (rather than stock) consideration. Investors must be notified if appraisal rights are available no less than 20 days before the vote on a given deal.

What are the mechanics of exercising appraisal?

Appraisal petitions are representative actions brought on behalf of all investors perfecting appraisal, meaning only one dissenting shareholder needs to file a petition and prosecute the appraisal case on behalf of others. The petition must be filed within 120 days of the effective date of the transaction. Within 20 days of filing, the corporation files an accompanying list of stockholders who have demanded appraisal and not previously settled. If the petitioner obtains a negotiated or judicially determined valuation, that result is available to all others who have perfected their rights.

What are the differences between appraisal rights and class actions?

Appraisal matters resemble class actions in that investors who exercise their appraisal rights benefit from the efforts of the named petitioner, who serves in a role similar to a lead plaintiff, without themselves having to prosecute the case. These suits differ from securities class actions and other shareholder matters in that they don’t involve claims of wrongdoing – they concern your right as a shareholder to an objective valuation of your investment. Unlike securities cases, both sides in an appraisal action provide evidence as to what the price should be. Since the court determines the final value, this levels the playing field between the investor and the corporation throughout the appraisal litigation.

The most critical difference between appraisal cases and class actions is that investors seeking appraisal must affirmatively opt in by perfecting their rights before the deal vote. Unfortunately, shareholders often fail to opt in before that vote, forfeiting their eligibility to later benefit from the Court’s valuation.

Learn more:

Download FRT’s whitepaper for more information on appraisal rights, including suggested best practices for addressing appraisal opportunities and perfecting your appraisal rights.

How Institutional Investors Are Letting Billions Slip Through Their Fingers in Delaware Appraisal Actions

Investors are leaving billions of dollars on the table in Delaware appraisal actions. With over 160 mergers and consolidations eligible for appraisal each year, it is critical to implement a process to identify opportunities where your firm may be underpaid for its shares.

In May, the Delaware Chancery Court issued its opinion in the Dell appraisal case, valuing the company’s common stock at 28% more than the $13.75 paid to shareholders on October 29, 2013. In other words, investors were underpaid by about $6 billion in the deal. Despite the magnitude of Dell’s underpayment, Dell is only paying $37 million to a handful of investors. Why? Most investors having failed to timely exercise their appraisal rights before the vote on the deal, are now ineligible for payments and have consequently left $5.96 billion on the table.

What you will learn:

•   An overview of Delaware appraisal law and recent trends

•   How appraisal awards can typically exceed tenders

•   How firms utilize appraisal rights without filing suit or prosecuting appraisal petitions themselves

•   Best practices on identifying, monitoring, and evaluating appraisal situations as to not miss out on future premiums