Academic journal article Fordham Journal of Corporate & Financial Law

A Dissent Dampened by Timing: How the Stock Market Exception Systematically Deprives Public Shareholders of Fair Value

Academic journal article Fordham Journal of Corporate & Financial Law

A Dissent Dampened by Timing: How the Stock Market Exception Systematically Deprives Public Shareholders of Fair Value

Article excerpt

The appraisal remedy for the dissenting shareholder is an unlikely looking topic for serious reflection. It seems narrow, technical, and of concern to the corporate specialist only. I believe this appearance is deceiving, however. The subject invites and rewards the kind of inquiry that was characteristic of Frank's mind - the search for the important behind the unimportant, the general behind the particular.

- Bayless Manning, in dedicating his essay, The Shareholder's Appraisal Remedy: An Essay for Frank Coker, 72 YALE L.J. 223 (1962).

INTRODUCTION

How David the Dissenter Is Denied Fair Value: A Hypothetical

In every U.S. state, the corporate law provides that under certain circumstances when a company engages in a merger or consolidation, dissenting shareholders2 are entitled to an appraisal right to receive the fair value of their interest in the company.3 Nonetheless, in 35 states, including Delaware, New York, and California, if a company's shares are publicly traded, dissenting shareholders are denied such a right and must divest their interest in the company through sale of their shares on the open market.4 This provision is commonly referred to as the stock market exception to appraisal rights.5 It was incorporated into state corporate statutes with the belief that dissenting shareholders could more efficiently receive the fair value of their publicly-traded shares through sale on the market than through appraisal.6 In at least one particular circumstance, though, the stock market exception fails to provide this fair value.

The majority of state corporate codes,7 including Delaware's General Corporate Law, may not provide dissenting shareholders of a surviving8 company in a statutory merger with adequate compensation as a result of the timing of merger information and the restraints of the stock market exception.9 The following hypothetical illustrates this problem:

Assume the boards of directors of a publicly-traded company, Surviving Public Co. ("SPC"), and another company, Disappearing Chemical Co. ("DCC"), adopt a resolution to merge which proposes that DCC will be merged into SPC; DCCs shareholders will receive one share of SPC for every share of DCC they own.10 On June 18th, the day before the merger is publicly announced, SPCs shares are selling at $50 per share and DCCs shares at $40 per share.11 On June 19th the companies release a joint press statement, making the proposed merger known to the public. Finally, the resolution to merge is submitted to the shareholders of both SPC and DCC for approval,12 and it is approved by a majority of the outstanding shares of each corporation.13

David the Dissenter, a 6% shareholder of SPC, hears about the proposed merger on CNN immediately after the announcement is made on June 19th. He disagrees with SPCs decision to absorb DCC in a merger because he has heard that DCC has been heavily involved in litigation as a result of alleged water pollution from its chemicals. He feels that SPC is headed in the wrong direction, both from an environmental citizenship perspective and a business perspective. As a result, David wants nothing more to do with SPC.

David immediately calls up his broker to sell his shares. His broker informs him that SPCs share price has fallen from $50 per share to $45 per share since the merger announcement was made ten minutes ago.14 Market analysts believe that SPC is overpaying for DCC and will not fully realize the projected synergies from the merger.15 David, a savvy investor who is aware that shareholders frequently have an appraisal right in such transactions, puts his broker on hold, and calls his lawyer.

He tells his lawyer he would like to exercise his appraisal right so that he can receive a price for his shares that does not reflect the proposed merger. David thinks he can get $50 for his shares rather than the current market price of $45; David's lawyer informs David that this is not possible, however; that, under the law of David's jurisdiction, via what is known as the "stock market exception," when a publicly-traded company engages in a merger or other fundamental transaction, dissenting shareholders have no right to seek appraisal and must sell their shares on the market. …

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