Dissenters’ Rights

What are Dissenters’ Rights?

Dissenters’ rights – part of a state’s business law – enable a company’s shareholders to get cash payments equivalent to the fair value of the shares he/she is holding in the company if the management of the company undergoes a major transaction that the shareholders do not consent or agree with. If the shareholders do not approve of the decision of a merger and want to move out of the company, dissenters’ rights provide them with a simple way out.

Generally, the board of directors and officers of a company oversee its regular operations. However, shareholders have the right to express their dissent in case of any major transactional endeavor – such as merger or acquisition – that will alter the company’s nature.

Prior to dissenters’ rights, even one shareholder opposing the merger or acquisition had the right to veto the transaction. Legislation has taken away that right and has, instead, enabled the shareholders to take cash payments against their shares in the company. However, the dissenters’ rights cannot be exercised on the shares that are traded on the national exchange.

Exercising Dissenters’ Rights

The shareholders of a company are entitled to exercise the dissenters’ rights and receive the shares’ fair value in the event of any of the following actions taken by the company:

1. If the company is one of the parties involved in a merger plan that has been made and the shareholder was permitted to vote, or approval was required for the transaction.
2. In the event of a share exchange plan being in effect, wherein the shares of the company have been acquired, and the shareholder was allowed to vote on the share exchange plan.
3. A disposition of a part or all of the company’s assets through a sale, exchange, or lease – other than the normal operation of the business – and the shareholder was allowed to vote. Such a disposition can include dissolution but not a disposition following a court order or a disposition where the shareholders are eligible to receive their share of the net proceeds from the disposition within a year from the disposition date.
4. If the articles of incorporation are amended, which affects the shareholders’ entitlement to redeem or cancel all of their shares in exchange for cash. The shareholders can exercise the dissenters’ rights regardless of whether or not they are allowed to vote on the articles of incorporation amendment.
5. However, the shareholders exercising the dissenters’ rights may not receive the cash payments for the fair value of their shares if the planned corporate action is canceled or a court with authority presses or permanently gives up the corporate plan of action.

Procedures of Dissenters’ Rights

For any corporate action submitted for voting at a meeting with shareholders, the meeting notice must specify that the shareholders may exercise the dissenters’ rights. Even in the absence of a meeting, the shareholders must be given written notice about the right to dissent to the action taken by the company.

After the receipt of the notice, any shareholder who wants to dissent should provide, in writing, their intent to dissent and demand the payment of their shares. The company is mandated to send in writing, to all the shareholders, information about where to deposit the share certificates, and where to send the payment demand.

The notice will also direct the dissenting shareholders when the corporation must receive the demand for payment. In case no payment demand is received, the dissenters’ rights will be canceled. Once the payment demand is received, the company pays the dissenting shareholders the estimated fair value of their shares and sends the shareholders the balance sheet of the company, along with an explanation of the estimation of the fair value of the shares.

In case the shareholder does not agree with the fair value estimation prepared by the company, he/she may notify the company in writing along with his/her estimate. If an agreement is not obtained, the company must commence a court proceeding in no later than 60 days and request the court to estimate the fair value of the shares. Otherwise, the company must pay the dissenter the amount he/she had estimated to be the fair value.

More Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

• Activist Shareholder
• Proxy Vote
• Corporate Bylaws
• Extraordinary General Meeting (EGM)
• See all equities resources