The controlling shareholders of a corporation have the power to alter a corporation so drastically that a minority shareholder may be left with an investment substantially different from the one the shareholder originally expected. However, under certain circumstances, a corporate transaction may actually give a dissenting shareholder the right to “cash out” by demanding payment for the “fair market value” of his shares
The dissenting shareholder’s appraisal rights are determined based on the type of transaction involved, but will typically apply in a reorganization such as a merger, stock-for-stock exchange or stock-for-assets exchange. There are several requirements that must be met, two of which are that the shareholder was entitled to vote on the transaction and his shares are not readily marketable, meaning saleable on an exchange.
Here’s how it works:
First, the shareholder must not vote in favor of the transaction.
Second, the shareholder must make demand on the corporation for payment of the fair market value of his shares within thirty days after the corporation gives notice of the approval of the transaction to its shareholders.
Third, the shareholder must deliver his share certificate(s) to the corporation to be endorsed as “dissenting shares.” If the corporation and shareholder agree on the price, the process is complete. If not…
Fourth, the shareholder must file a lawsuit within six months after the corporation gave notice of the approval of the transaction to its shareholders.
The court will determine the fair market value of the shares or appoint one or more appraisers to determine the value. The corporation will then be required to purchase the shares at that price. If the value determined by the court is greater than the amount offered by the corporation, the dissenting shareholder may be entitled to recover his costs of the lawsuit, including his legal fees.
A minority shareholder may have limited rights, but that doesn’t mean that, under certain circumstances, the minority shareholder can’t cash out.
This alert is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this alert does not create any attorney client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.