Appraisal rights under Delaware LLC Act

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

In connection with a merger or consolidation under the DGCL, a stockholder of a Delaware corporation has the right to have the Court of Chancery determine the fair value of their stock and require that the corporations pay that value, a process known as “appraisal rights.” Appraisal rights arrise under several sections of the DGCL.

Section 251, Merger or consolidation of domestic corporations and limited liability company.
Section 252, Merger or consolidation of domestic an foreign corporations.
Section 253(d), Merger of parent corporation and subsidiary or subsidiaries, (a stockholder in a corporate subsidiary has appraisal rights in a “short form” parent subsidiary merger when the parent corporation does not own all of the subsidiary’s stock immediately prior to the merger).
Section 254, Merger or consolidation of domestic corporation and joint-stock or other association.
Section 257, Merger or consolidation of domestic stock and nonstock corporations.
Section 258, Merger or consolidation of domestic and foreign stock and nonstock corporations.
Section 263, Merger or consolidation of domestic corporations.
Section 264, Merger or consolidation of domestic corporation and limited liability company.

Section 262 provides the mechanism for the appraisal. Section 262(b)(1) limits appraisal rights such that “no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of § 251 of this title.”

Section 262(b)(2) determines those situations when appraisal rights are granted:

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except:

a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof;

b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 holders;

c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or

d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph.

The LLC Act does not have a corollary to Section 262. Section 18-210, Contractual appraisal rights, provides as follows:

A limited liability company agreement or an agreement of merger or consolidation may provide that contractual appraisal rights with respect to a limited liability company interest or another interest in a limited liability company shall be available for any class or group or series of members or limited liability company interests in connection with any amendment of a limited liability company agreement, any merger or consolidation in which the limited liability company is a constituent party to the merger or consolidation, any conversion of the limited liability company to another business form, any transfer to or domestication or continuance in any jurisdiction by the limited liability company, or the sale of all or substantially all of the limited liability company’s assets. The Court of Chancery shall have jurisdiction to hear and determine any matter relating to any such appraisal rights.

The LLC Act goes in the opposite direction from the DGCL. The DGCL provides for mandatory appraisal rights in certain circumstances in connection with a merger or consolidation while the LLC Act provides that appraisal rights do not exist except when those rights are specifically provided for in the company agreement or an agreement of merger.

The lack of mandatory, statutory, appraisal rights has the potential to lead to mischief. In the case of merger which is structured to squeeze out a member for less than the fair value of their interest it is likely that if presented to the Court of Chancery, the court would apply the implied contractual covenant of good faith and fair dealing to grant the member relief. The Court has not yet been faced with this issue, but it is only a matter of time before that happens.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.