By Liza Kirillova and Elliot Weiss
The ability to demand appraisal rights to determine the fair value of a company’s stock is a powerful tool exerted by stockholders. For this reason, it is worth noting a recent amendment to the Delaware General Corporation Law (DGCL) Section 262—the provision that governs appraisal rights following mergers, consolidations or conversions of Delaware corporations.
For context, shareholders can hold shares of stock directly or indirectly. A registered owner or record holder holds shares directly with a corporation, while a beneficial owner holds shares indirectly through a bank or broker-dealer. The amendment to Section 262 clarifies that a beneficial owner may also include any holder of stock in a voting trust or any nominee on behalf of the registered owner.
That being said, the amendment—which only applies to mergers, consolidations or conversions adopted or entered into on or after August 1, 2022—goes on to specify that beneficial owners of stock in a Delaware corporation can now demand appraisals of their shares directly, thereby eliminating the prior requirement of having the record holder demand appraisals on their behalf.
More specifically, Section 262(d)(3) permits beneficial owners to invoke appraisal rights through a written demand upon satisfaction of the following conditions:
- The beneficial ownership of the stock is maintained from the date of the demand through the date of the merger, consolidation, or conversion;
- The stockholder otherwise satisfies the requirements under Section 262(a), including the condition that the stockholder has neither voted in favor of the merger, conversion or consolidation nor consented to it in writing; and
- The beneficial owner submits evidence of their beneficial ownership of the stock, along with other identifying information including the owner’s address and the identity of the record holder.
The amendment to Section 262 also ensures that the expenses of a stockholder or a beneficial owner who engaged in an appraisal proceeding will be charged pro rata against the value of all the shares entitled to an appraisal award. The amendment also impacts appraisal notice requirements. Delaware corporations no longer have to include a copy of Section 262 in a notice of appraisal rights, provided that the notice includes directions for accessing the statute electronically (e.g., through the State of Delaware website). For practical purposes, companies that attach a link directly to their official websites will guarantee that stockholders are accessing the current version of Section 262 in order to fully understand the scope of their rights.
Given that appraisal rights protect minority stockholders from receiving less than the fair value of their stock in major corporate transactions, the amendment carries certain important economic implications. For example, if a dissenting stockholder exercises appraisal rights and a court determines that the fair value of the dissenting stockholder’s shares is higher than the consideration offered in a merger transaction, the buyer is responsible for making up the difference to compensate the dissenting stockholder. Consequently, the increased availability of appraisal rights might deter some buyers from consummating merger transactions or business combinations without the approval of all stockholders of the target corporation, including those who hold stock in a voting trust or by a nominee.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.