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LEGAL: Minority Shareholders' Appraisal Rights

 





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Companies considering a fundamental transaction need to anticipate potential demands from disgruntled shareholders seeking to exercise their new appraisal rights, says Driver, director at Werksmans Attorneys. Disposals of a majority of a company's assets, mergers with other companies and schemes of arrangement between companies and their shareholders are fundamental transactions.

The new Companies Act introduced appraisal rights for shareholders in order to allow them to exit a company for fair value where the company undergoes a fundamental transaction. These appraisal rights allow dissatisfied shareholders who opposed the fundamental transaction and followed the prescribed steps to demand that the company buy their shares for fair value.

Appraisal Rights Could Cause Companies to Pay Out Cash to Shareholders

“Shareholders who are dissatisfied with the value attributed to their company or its assets in a fundamental transaction, could use their appraisal rights to ask the company to buy them out at fair value,” says Driver. “After such a demand is made, the company must offer to buy their shares at fair value and, if they are not happy with the company's view of fair value, they can go to court and ask the court to determine the fair value.”

The potential exercise of appraisal rights creates a risk that the company will be forced to pay out cash to its shareholders which it had not planned to pay, and that the company could be involved in a lengthy process to determine the entitlement of its disaffected shareholders.

Companies are therefore commonly inserting conditions into their fundamental transactions in order to manage these risks posed by appraisal rights.

Certain Appraisal Rights Cause Uncertain Company Exposure

These conditions will typically provide that, if more than a specified threshold percentage of shareholders position themselves to exercise their appraisal rights, the transaction will not proceed. There is no established norm for that threshold percentage, and it will depend on the type of transaction and the circumstances of the parties.

“The design of these conditions needs to strike a balance between ensuring that the transaction will not proceed if it will result in too great a burden being placed on the company as a result of demands for cash on the one hand and killing the transaction and allowing the transacting parties to walk away too easily on the other hand,” says Driver.

"While parties to fundamental transactions often work hard to ensure maximum deal certainty, appraisal rights create an uncertain exposure for a company engaging in a fundamental transaction. Consequently, parties to transactions seek means of bringing certainty to their exposure, even if it means the potential termination of the transaction."

These conditions do not negate the appraisal rights, but seek to ensure that transactions do not proceed to trigger appraisal rights if those appraisal rights could be too burdensome.


 
 
 
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