An appraisal right is the statutory right of a corporation’s minority shareholders to have a judicial proceeding or independent valuator determine a fair stock price of their shares that would otherwise be subject to divesture, and oblige the acquiring corporation to repurchase shares at that price.
Valuation methods in determining the fair stock price.
Analysts may use multiple valuation methods in determining the fair stock price and value of the acquired company, including asset-based methods, income or cash flow methods, comparable market data models, and hybrid or formula methods. A court will ultimately perform a valuation of the target company using experts who provide competing valuation theories and methodologies, and will award the investor who invoked its rights the value of the shares in the company as a going concern that the court found to be fair. In addition, the court will also award interest on that amount. In mergers and acquisitions, appraisal rights guarantee that shareholders receive adequate compensation if they believe a merger or acquisition undervalues their shares.
What triggers appraisal rights?
The nature of the corporate action which triggers this right differs in every state. For example, some states make appraisal rights available in an asset purchase transaction or when a company makes certain amendments to its certificate of incorporation, while others do not. However, almost all states consider corporate consolidations and mergers as transactions triggering appraisal rights. By invoking appraisal rights, an investor uses the law to ask a court to determine the value of his or her shares of stock, or other securities, even though a company board or a special committee has decided to agree to a merger, acquisition or other transaction.
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.
Additional resources provided by the author
Timothy L. Miles has dedicated his career to representing shareholders in complex class-action litigation. Whether serving as lead, co-lead, or liaison counsel, Mr. Miles has helped recover hundreds of millions of dollars for defrauded investors, shaped precedent-setting decisions, and delivered real corporate governance reforms. Judges and peers have repeatedly recognized Mr. Miles’ relentless advocacy for shareholders, as well as his unbendable ethical standards. For example, Mr. Miles is a member of the prestigious Top 100 Civil Plaintiff Trial Lawyers: The National Trial Lawyers Association, which is by invitation only and is “extended to those attorneys who exemplify superior qualifications, trial results, and leadership in their respective state based upon objective and uniformly applied criteria.” The National Trial Lawyers Association explained the significance of this honor: “With the selection of Timothy L. Miles by The National Trial Lawyers: Top 100, [Mr.] Miles has shown that he exemplifies superior qualifications, leadership skills, and trial results as a trial lawyer. The selection process for this elite honor is based on a multi-phase process which includes peer nominations combined with third party research.” Mr. Miles other recognitions include: • The AV® Preeminent™ Rating by Martindale-Hubble® in Securities Law, Litigation and Class Actions (2014-2018). The AV Rating is the highest possible rating given by LexisNexis Martindale-Hubbell Peer Review for a lawyer and is established on a peer-review basis. The AV Preeminent designation signifies that Mr. Miles has been rated by judges and fellow attorneys as having the highest possible rating for legal abilities and ethical standards. The rating is awarded to less than five percent of all attorneys across the United States, and is the highest rating offered by the Martindale-Hubbell Law Directory. • The AV® Preeminent™ Attorney – Judicial Edition, the Highest Possible Rating in Both Legal Ability & Ethical Standard Reflecting the confidential opinions of members of the Bar and Judiciary by Martindale-Hubble (2017-2018). • The Top-Rated Lawyer in Litigation™ for Ethical Standards and Legal Ability by Martindale-Hubble® (Feb. 2015). • Superb Rated Attorney, (10.0 out of 10), the Highest Rating Possible by Avvo. • Avvo Top Rated Lawyer 2017 & 2018 (Avvo). . • America’s Most Honored Professionals – Top 1% (2016-2018) (American Registry). Mr. Miles focuses his practice on securities fraud class actions, shareholder derivative actions, and corporate mergers and acquisitions class actions.