Dissenters' Rights Law in Five Easy Pieces
By: JAMES E. DORSEY & THOMAS S. FRASER
February 2004
Mergers and other corporate transactions don’t always happen smoothly. In certain circumstances, an unhappy minority shareholder may be able to force a corporation or a limited liability company to redeem his or her shares or interests. This right arises when a shareholder dissents from a fundamental corporate change and opts to sell his or her shares for “fair value.” Over the past several years, Minnesota’s appellate courts have seen a steady increase in these cases.
Historically, mergers and other fundamental corporate transactions required unanimous shareholder consent. This gave too much power to the minority because a single shareholder owning one share could block a major transaction, such as an acquisition or a merger that was in the best interests of the corporation.
In response to this problem, state legislatures began passing statutes that took away dissenting shareholders’ right to veto fundamental corporate changes. In its place, the legislatures gave dissenting shareholders (or members, in the case of LLC’s) the right to receive a cash payment for the “fair value” of their stock.
In Minnesota, the following corporate (or LLC) actions trigger dissenters’ rights:
- an amendment of the articles of incorporation (or articles of organization) affecting shareholders’ (or members’) rights or preferences;
- a sale or other disposition of substantially all of the corporate (or LLC) assets;
- a merger;
- an exchange of shares with an acquiring business entity; or
- any other corporate (or LLC) action by shareholder (or member) vote where dissenters are entitled to payment for their shares (or interests).
Five Guidelines Help You Over Hurdles
If you are either a principal or a dissenting shareholder/member in a corporation/LLC that has had a triggering event you might have a protracted and painful ordeal in store for you. Here are five important ideas to bear in mind as you proceed through the hurdles you will face.
Observe carefully the rules and deadlines for dissenting and responding to a dissenter. Within prescribed time limits, the corporation/LLC must provide a series of four notices or summaries to shareholders (the fourth such submission being a petition to the court), and the dissenter must file three different notices or demands.
Select an appraiser who will stand up in court. He or she will present reams of detailed information and numbers to the court. In turn, your appraiser will be vigorously cross-examined by your opponents with the help of their appraiser. You need a good, strong, articulate and independent witness.
Work with your appraiser. Advise your appraiser about the law on discounts before you receive the appraisal report. Advise your appraiser about the exact valuation date and keep your appraiser, and information on which the appraiser relies from trespassing beyond the valuation date. Only in rare cases will the court allow post-valuation date evidence.
Do not “low ball” the dissenter or file a frivolous dissent. While this is not a major league baseball arbitration (in which the mediator must choose one party’s number and may not split the difference), staking out an extreme position has its risks. The attorney’s and expert’s fees that can be assessed are substantial.
Do not assume the case will settle. Emotions run high and settlements are difficult to achieve in these corporate “divorce” cases. The corporation/LLC does not want to pay a dissenter more than it paid the non-dissenters. The dissenter did not want to part with his or her stock/interests in the first place, thinks the corporation/LLC is more valuable than it now says, and wants what is due.
Dissenters’ right law applies to both public and private corporation.
If you run into a dissenters’ rights situation, or have questions about the proper procedures, call Tom Fraser at (612) 492-7028 or Jim Dorsey at (612) 492-7079 for assistance.