Corporate and LLC statutes in many states include so-called “dissenter’s rights” provisions, which give equity holders a right to be cashed out of their equity position, if they object to a merger, acquisition, or certain other major corporate actions, such as conversions. A company’s failure to follow or “opt out” of these procedures, could be subject to lawsuits, resulting in court orders to comply with the proper procedures or damage awards to the dissenting holder. This blog post discusses how dissenter’s rights work and how certain entities can opt out of their applicability.
How Dissenter’s Rights Work
While dissenter’s rights statutes vary from state to state, they typically require the following:
- Dissenter’s Rights Notice. The company must provide each holder who does not approve the applicable transaction, with a so-called “Dissenter’s Rights Notice” which (a) describes the transaction in detail, (b) includes a copy of the dissenter’s rights statute, (c) includes an offer to purchase the equity of the dissenting holder, for what the company deems the fair market value of such equity, and (d) clearly explains the procedure for exercising and perfecting the holder’s rights if the holder does not accept the buyout offer.
- Notice of Objection. Holders generally have between 10-30 days to approve the transaction or send an objection notice to the buyout offer.
- Perfection Period. If a holder rejects the buyout offer, it must file an appraisal action in state court within a specified perfection period, typically 120 days following delivery of the objection.
- Termination of Rights. The dissenter’s rights terminate if the holder does not timely (a) deliver an objection notice, or (b) file an appraisal action.
Opting Out
Certain statutes permit equity holders to opt out of statutory dissenter’s rights, by including, an opt-out provision in the Certificate of Incorporation, Bylaws, Stockholder Agreement, or in the case of a limited liability company, the Operating Agreement.
Due to the cost and burden of perfecting the dissenter’s rights, it is unlikely that minority stockholders in smaller non-public companies will exercise the dissenter’s rights. I have worked on several private transactions with clients having hundreds of equity holders, and have only seen one equity holder serve an objection notice, and such a holder never filed a valuation lawsuit to perfect its rights. Companies, however, should review their corporate statute and consider including an opt-out provision to eliminate the burden of having to follow the dissenter’s rights procedure in future transactions.
It is also important to note that even if the dissenter’s rights do not apply in a company’s jurisdiction of formation, the dissenter’s rights statute in jurisdictions in which the company’s equity holders reside may apply. For example, California has extended dissenter’s rights requirements to foreign entities, which are majority owned by California residents.
The information contained in this article is strictly for educational purposes and is not intended to be legal or tax advice or to be relied upon by anyone without doing their own research, and consulting with legal and tax advisors.