M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, September 13, 2018

The nonsensical market out in appraisal

Just got to thinking about appraisal's market out exception and it strikes me that it doesn't make much sense. Sure, sure, students have a tough time reading and then understanding the statutory provision (thanks drafters). But I mean something different. If you receive stock in a publicly traded corporation or in stock of the acquirer, then no appraisal rights for you. If you receive cash for your stock, you get appraisal rights. Ok. But, the appraisal remedy was originally adopted at a time when consideration in mergers was mostly stock. Dissenting stockholders who didn't want the stock of the acquirer at the exchange ratio agreed to in the merger were given the right to be cashed out - to receive the value of their stock in cash money. So, modern appraisal statutes seem to get this exactly backwards. If you receive stock, no appraisal. If you receive cash (something other than stock of the surviving corporation or publicly traded stock), you have rights. 

Now that we live in the merger price as fair value era, it strikes me that we've moved very far away from appraisal's original intent into a weird place. I wonder whether it's even worth it.

See, now that I'm no longer an Associate Dean you get these random corporate law thoughts.



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I'm with you, at least without major changes. The main justification for it today is simply that it does a better job than fiduciary duty lawsuits of deterring bad deals, in part because of the barriers to nuisance suits. I'm okay with that as a second best solution but I'd much rather fix fiduciary duty lawsuits in the first place; that's what they're there for.

Posted by: Ann Lipton | Sep 13, 2018 9:16:33 AM

States use widely varying criteria in determining whether a corporation is to be deemed public (and thus subject to the market-out exception) or private. Some use a clear and simple definition – shares are deemed publicly traded if they are listed on a national securities exchange. Some states deem any shares traded on any “organized market” to be publicly traded, and some do not even require that a market exists.
Where the 2,000 shareholder requirement is an alternative to listing, (a) some states exclude insider shares, (b) some states require 2,000 shareholders of record, and (c) some states require a minimum aggregate market value of common stock, usually $20 million.
Some states deem companies with 2,000 or more shareholders to be publicly traded even if there is no organized market. The assumption that shares of companies having more than 2,000 shareholders are liquid when there is no organized market is unrealistic, since shareholders have no liquidity without an organized market. In practice, numerous companies with 2,000 shareholders are not actively traded and sometimes are clearly illiquid: some large private companies have shareholder agreements that limit or even prohibit selling to third parties. Moreover, many companies that trade in the “pink sheets” have numerous shareholders but minimal trading volume. “Pink sheet” companies often have inadequate public disclosure (or none at all), so their trading prices are highly unlikely to reflect the company’s value. The underlying concept of the market-out exception is that shareholders have the option of selling in an active and informed market. Shareholders do not have this option unless there is a liquid and informed market into which they can sell.

Posted by: Gilbert E. Matthews | Sep 14, 2018 1:45:04 PM