Dissenters’ rights is a little known and little used statutory procedure that can be invoked under particular circumstances which may solve disputed issues in a business divorce. The basic concept of dissenters’ rights is to allow a shareholder to be bought out at fair value when a substantial change in corporate structure is about to take place. Utah statutes provide a detailed procedure for the exercise of dissenters’ rights. No comparable provision exists in the Utah limited liability company statutes.
TRIGGERS FOR DISSENTERS’ RIGHTS
A number of corporate actions trigger the right of a shareholder to dissent and obtain fair value for the shares. First, if the corporation is a party to a plan of merger, including where a subsidiary is merging into a parent company, dissenters’ rights apply. If the corporation is a party to a share exchange and the shareholders are entitled to vote on the plan dissenters’ rights are triggered. Next is when a sale or exchange of all or substantially all of the property of the company occurs, unless the sale is pursuant to a court order or a sale for cash payable one year from the date of the sale. Dissenters’ rights exist if there is going to be an amendment to the Articles of Incorporation that materially and adversely affects a dissenters’ preferred rights in shares, creates or alters a right of redemption, alters a preemptive right, or excludes the right of the shares to vote on any matter including cumulative voting for directors. If a shareholder elects to dissent from any of these actions, a shareholder may not object or challenge the corporate action unless such action is fraudulent. Finally, the right to dissent is not applied to shares traded on a national exchange.
DISSENTERS’ RIGHTS PROCEDURES
If any of these proposed actions will be submitted to a vote at a shareholder meeting, the meeting notice must state that the shareholders may assert dissenters’ rights. Even if there is no meeting, a notice still must be given in writing to shareholders about their right to dissent to the corporate action. Once the notice is received, any shareholder who may want to dissent must deliver in writing their intent to demand payment for their shares and dissent. It is incumbent upon the corporation to send a writing to all shareholders not later than ten days after the triggering corporate action is taken and advise the shareholders where payment demand must be sent and where share certificates may be deposited. That same notice will advise the dissenting shareholder when the corporation must receive the shareholder’s demand for payment of their shares. The shareholder must comply and send a demand for payment consistent with that notice. If no demand for payment is received the rights are waived. Upon receipt of the payment demand, the corporation shall pay the dissenter what the corporation estimates to be the “fair value” of the shares and shall send to the shareholder the Company balance sheet together with an explanation as to how the fair value estimate was calculated.
If the shareholder is dissatisfied with the corporation’s estimate of the fair value, the dissenter may notify the corporation in writing of their estimate, less any payment tendered or otherwise reject the offer and demand full payment of fair value. Thereafter, if the matter is not resolved, the corporation is required to commence a court proceeding within sixty days and ask the court to determine the fair value of the shares, or otherwise pay the amount the dissenter estimates to be the fair value. All disputing dissenters must be a part of this action. There is no right to a trial by jury and the court may appoint a master or others to assist it in determining fair value. Each dissenter is entitled to obtain a judgment for the amount which the court finds is the fair value of the shares exceeding the amount offered by the corporation, if any. This is often called an “appraisal proceeding.”
THE COURT DETERMINES FAIR VALUE
The court shall take evidence and determine fair value but has a right to assess expenses and attorney fees. The expenses assessed may also include the cost of experts. The court may find against the corporation in favor of the dissenter if it finds the corporation did not comply with procedural requirements, against the dissenter if the fair value does not materially exceed” the amount offered by the company; or against either the company or dissenter if it finds that the party against whom the fees and expenses assessed acted “arbitrarily, vexatiously, or not in good faith with respect to the rights provided …” by the dissenters’ rights process.
The term “fair value” is defined in the dissenters’ rights statutes to mean the value of shares immediately before the effectuation of the corporate action to which the dissenter objects excluding any appreciation or depreciation in anticipation of the corporate action unless such exclusion is inequitable. The statutory definition does not deal with the issue of discounts for either a minority interest or lack of marketability, discounts commonly given for fair market value calculations. However, in Utah, case law states that fair value is not the same as fair market value and does not include discounts for marketability or minority interest.
The practitioner should be alert to any of the possible triggering events during an owner dispute as the existence of any such triggering device may conclude a business divorce. The parties must carefully calculate their estimations and demands of fair value since the entire cost of the proceeding, including expert fees is at risk of being awarded to a successful party. The statutes were designed to deter an actual court proceeding by increasing the risk of loss. The court proceeding should probably only be one day with the evidence likely limited to the expert reports and perhaps some other related matters.
The dissenters’ rights statutes present an admirable, limited procedure to allow a shareholder, under key circumstances, to remove themselves from their business partners and hopefully terminate a dispute receiving fair value for their interest in the company.
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