A Lesson from Startups: Contracting Out of Shareholder Appraisal

A Lesson from Startups: Contracting Out of Shareholder Appraisal

Jill Fisch

Series number :

Serial Number: 
537/2020

Date posted :

August 21 2020

Last revised :

March 16 2021
SSRN Share

Keywords

  • law & economics • 
  • publicly vs. privately held corporations • 
  • Mergers & Acquisitions • 
  • M&A • 
  • securities valuation • 
  • appraisal arbitrage • 
  • shareholder litigation • 
  • corporate charters & bylaws • 
  • Delaware general corporation law • 
  • DGCL • 
  • Model Business Corporation Act • 
  • MBCA

Appraisal is a controversial topic. Policymakers have debated the goals served by the appraisal remedy, and legislatures have repeatedly revised appraisal statutes in an effort to meet those goals while minimizing the cost and potential abuse associated with appraisal litigation.

Courts have struggled to determine the most appropriate valuation methodology and the extent to which that methodology should depend on case-specific factors. These difficulties are exacerbated by variation in the procedures by which mergers are negotiated and the potential for conflict-of-interest transactions.

Private ordering offers a market-based alternative to continued legislative or judicial efforts to refine the appraisal remedy. Through firm-specific appraisal waivers, issuers can limit or eliminate the scope of appraisal rights, thereby reducing the cost and uncertainty of appraisal ex ante. Private companies are making increasingly use of such appraisal waivers, an effort facilitated by a Delaware decision upholding the validity of an appraisal waiver in a private company shareholder agreement. Public companies have not followed the lead of private companies, however, presumably because of impracticality of using shareholder agreements in public companies and a concern that an appraisal waiver in a charter or bylaw would be invalid.

This Article considers both the normative and legal case for appraisal waivers. It argues that the modern role of appraisal rights – disciplining the merger negotiation process and policing potential conflicts of interest – warrants understanding appraisal as a structural component of corporate governance rather than a personal right of individual shareholders. Accordingly, it challenges legal analysis that distinguishes between contractual waivers and those in a corporation’s governing documents. It nonetheless reasons that firmspecific freedom to limit or eliminate appraisal rights through waivers is normatively desirable in that it reduces the pressure on lawmakers to get the appraisal remedy “right,” allows appraisal rights to vary in accordance with firm-specific factors and allows tailored appraisal rights that vary according to transactional features. It concludes that both public and private companies should have the power to adopt appraisal waivers.

The Article then considers the legal case for appraisal waivers and determines that their validity under current law is questionable at best based on both the scope of existing appraisal statutes and public policy considerations. In light of its conclusion that the availability of appraisal waivers is normatively desirable, the Argument advocates resolving this uncertainty through legislation. The Article proposes that corporation statutes explicitly authorize corporations to modify or eliminate appraisal rights, but that such waivers should only be permitted in corporate charters. This paper was originally posted with the working title of “Appraisal Waivers.”

Published in

Published in: 
Publication Title: 
Iowa Law Review, Forthcoming

Authors

Real name:
Research Member, Board Member
University of Pennsylvania Law School