Appraisal rights allow minority shareholders to disagree with major actions, such as a merger, and request the company to buy back their shares at a rate determined by an outside evaluator. This right is granted by law to protect minority shareholders’ rights.
Appraisal rights are rights available to minority shareholders who disagree with a major action, such as a merger by the company in which they own shares. These shareholders can vote against the stock and then file a request to exercise their appraisal right, forcing the company to buy back their shares at a rate determined by an outside evaluator. The right to appraise is granted to investors in many regions of the world by law in response to concerns about the rights of minority shareholders.
Historically, all shareholders were created equal, to some degree, and a unanimous vote was needed for actions like mergers. The law was later modified, allowing majority shareholders to dictate the future direction of the companies in which they invested. For minority shareholders, this could mean being dragged along with a decision they opposed or wanted no part of. As a result, the concept of assessment rights was developed.
Under the appraisal rights, shareholders who oppose a merger have the right to request that a third party determine the value of the shares. With this evaluation, the company must buy back the shares of investors who want to withdraw from the company’s shareholder group. The appraiser assesses the value of the shares as it would have been before the merger.
There are several reasons why people might object to a merger and want to use their assessment rights. For example, people with shares in a rapidly growing company might resent a merger with a company that is not experiencing a high growth rate, arguing that the rate of return on their shares will decrease. People may also feel that a merger is not in a company’s best interest or that it conflicts with the stated objectives of the company. Ethically conscious investors may also not want to associate with companies they believe violate ethical standards.
To exercise appraisal rights, minority shareholders must vote against the corporate actions they oppose and submit a request to indicate that they intend to exercise their appraisal right. People can’t decide after the fact that the merger is unfavorable and force the company to buy back its shares at appraised value, for example. The specific steps that need to be taken may vary by region and it is advisable for shareholders to familiarize themselves with the rights assessment process if they are concerned about an upcoming merger.
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