Academic journal article Law and Contemporary Problems

The Case for Iterative Statutory Reform: Appraisal and the Model Business Corporation Act

Academic journal article Law and Contemporary Problems

The Case for Iterative Statutory Reform: Appraisal and the Model Business Corporation Act

Article excerpt

I

INTRODUCTION

Appraisal may be the Model Business Corporation Act's (MBCA) most distinctive and creative corporate law product in its sixty year history. (1) This right of shareholders to require the corporation to pay them the fair value of shares upon some mergers or other fundamental changes does not seem a likely candidate for a statutory success story. It is a policy provision that does not exist widely outside the United States, (2) its initial purpose has essentially disappeared, its statutory language is often the most convoluted of any section of a corporations code, and its history has been a series of statutory and judicial steps to gut its provisions. (3) Yet, through a series of changes, beginning in the late 1970s and early 1980s, and continuing through revisions in 1999 and 2006, the MBCA has shown the value that can come from an ongoing revision process of corporate law. It took several efforts to produce a remedy directed towards conflict of interest rather than providing liquidity, and there were missteps along the way. Yet, the result has brought coherence to a topic where it has been sorely lacking; the product seems to have staying power even though it has not yet been widely adopted by the states. This article examines how this shift came about, looking first at the challenges that have long plagued appraisal statutes, and then evaluating the product that has resulted from the MBCA approach.

II

THE CHALLENGES PRESENTED TO LAW REFORMERS BY THE TRADITIONAL APPRAISAL STATUTES

The appraisal process has long appeared dysfunctional to commentators and many judges. (4) In one sense, this is because there is no longer a social consensus behind the law's original purpose that a merger or other fundamental change should be a trigger to permit individual shareholders to demand that the corporation repurchase their stock, a liquidity that investors in the corporate form usually lack. (5) The array of appraisal avoidance techniques receiving legal sanction has grown over the decades in topsy-turvy ways that have undermined any coherent functioning of the appraisal process or an understanding of its purposes. An even larger contributor to this dysfunctionality is that, as this liquidity use of appraisal has diminished to the point of invisibility, appraisal has grown dramatically in a different transactional context where shareholders are guaranteed liquidity for their investment, but need protection against the conflict of interest of those in control of the corporation who are setting terms at which the minority shareholders must exit. The traditional procedures of the appraisal statute, originally put in place to make it harder for shareholders choosing to get out, now work to exacerbate the difficulty of a minority shareholder being forced out of the enterprise on terms set by the majority. Legislators have been slow to update appraisal statutes, and courts, even if more attuned to the need to keep corporate law current, have been uneven in the extent to which they have captured this fundamental shift.

A. The Decline of the Traditional Liquidity Function of Appraisal Statutes

Appraisal statutes appeared in state statutes at the time that general incorporation statutes first gave majority shareholders in corporations a clear route to approve a merger or other fundamental change by less than a unanimous shareholder votee. (6) These statutes provided minority shareholders the ability to exit from an enterprise when the majority owners fundamentally shifted the entity's business. (7) This remedy provided, as continues to be common today, that the minority shareholders would receive the value of their shares at the time just before the merger, exclusive of any change due to the merger, thus preserving the investment value as it existed prior to the change to which the minority objected. (8)

Concern over the adverse impact on the continuing business from the corporation having to shrink the size of its capital by giving back cash to dissenters was visible early on in the appraisal context and grew over the twentieth century. …

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