Appraisal Rights are a statutory right of a corporation’s minority shareholders who object to certain extraordinary actions taken by the firm. In this case, mergers or acquisitions. This particular course of action normally allows shareholders to have a judicial proceeding or independent valuator determine a fair stock price and oblige the acquiring corporation to repurchase shares at that price.
Appraisal rights are available in many states and each may have its own unique interpretation as to the nature of the extraordinary corporate action that invokes this right. Whereas virtually all states consider mergers and acquisitions as events that trigger appraisal rights, only some states for example may make appraisal rights available if the corporate event is an asset purchase. Appraisal rights, sometimes referred to as dissenters’ rights are a protection policy for shareholders. The rights prevent corporations involved in a merger or acquisition from paying less than the company is worth to the shareholders.
Enacting The Right
To perfect appraisal rights, the dissenting stockholder must follow the requirements set out in the applicable state statute. Failure to do so may result in the stockholder permanently risks losing its right to an appraisal. It is vitally important the stockholder is aware of the differing rules employed by each individual state. The target corporation that is the subject of the appraisal demand must comply with certain procedures to respond to and participate in the appraisal proceeding.
Analysts may use multiple valuation methods in determining the fair stock price and value of the acquired company including the following
- asset-based methods
- income or cash flow methods
- comparable market data models
- hybrid or formula methods
While most occurrences of appraisal rights are based on consolidation or mergers, they may also apply to instances when the corporation takes any extraordinary action that shareholders deem harmful to their interests. In mergers and acquisitions, appraisal rights guarantee that shareholders receive adequate compensation if a merger or acquisition overrides their wishes.
Appraisal Rights Example
The following text is taken from the Form DEFM14A Definitive proxy statement relating to merger or acquisition made by Fitbit (FIT) on December 12, 2019 in relation to the proposed takeover by Google (GOOG, GOOGL)
“If the Merger is completed, our stockholders who (1) submit a written demand for an appraisal of their shares prior to the stockholder vote on the adoption of the Merger Agreement, (2) do not vote or submit a proxy in favor of the adoption of the Merger Agreement, (3) take certain actions and meet certain conditions under the Delaware General Corporation Law (the “DGCL”) and (4) do not thereafter withdraw their demand for appraisal of their shares of Fitbit Common Stock or otherwise lose their appraisal rights, in each case in accordance with the DGCL, will have the right to have such shares appraised by the Delaware Court of Chancery and to receive payment of the fair value of such shares, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, on the amount determined to be the fair value. For a more detailed discussion of your appraisal rights, see the section captioned “Proposal 1: Adoption of the Merger—Appraisal Rights.” Section 262 of the DGCL is reproduced in its entirety in Annex C to the accompanying proxy statement and is incorporated therein by reference.”
In this document, appraisal rights are clearly stated and it is shown where shareholders can obtain more information. DGCL is the most common set of rules followed as the majority of public firms are incorporated there and also serves as a guide to other states.
