Opinion ID: 2630535
Heading Depth: 3
Heading Rank: 1

Heading: Purpose of the Dissenters' Rights Statute

Text: Historically, the dissenters' rights statutes were intended to compensate minority shareholders for the loss of their veto power and to provide liquidity for dissenting shareholders who found themselves trapped in an involuntarily altered investment. See Barry M. Wertheimer, The Purpose of the Shareholders' Appraisal Remedy, 65 Tenn. L.Rev. 661 (1998); Mary Siegel, Back to the Future: Appraisal Rights in the Twenty-First Century, 32 Harv. J. on Legis. 79, 93-97 (1995). In recent years, the purpose of modern dissenters' rights statutes has been vigorously debated by commentators. [7] The consensus that has developed among courts and commentators is that the modern dissenters' rights statute exists to protect minority shareholders from oppressive conduct by the majority. See Wertheimer, supra, at 689 (The case law suggests [the appraisal remedy] does serve several functions, although each involves an overriding goal of minority shareholder protection.); Thompson, 84 Geo. L.J. at 4 (Now the remedy serves as a check against opportunism by a majority shareholder in mergers and other transactions in which the majority forces minority shareholders out of the business and requires them to accept cash for their shares.); M Life, 40 P.3d at 13 (citing Breniman v. Agric. Consultants, Inc., 829 P.2d 493, 496 (Colo. App.1992)) (the purpose of the dissenters' rights statute is to protect the property rights of dissenting shareholders from actions by majority shareholders which alter the character of their investment.). The necessity of a dissenters' rights statute for protection of minority shareholders is illustrated by examining the situations in which the remedy is typically used today. The original concern of the appraisal remedy was for shareholders who were trapped in a post-merger investment that did not resemble their original investment. Wertheimer, supra, at 667. Today, financial practice and legal environments have changed such that mergers are often used solely to cash-out minority shareholders. See Thompson, supra, at 25-28 (conducting a survey of appraisal cases over the course of the prior decade and noting that over eighty percent of those cases involved some form of a cash-out merger). In a typical cash-out merger, a corporation creates a shell company which is owned by the corporation's majority shareholders. The original corporation and the shell company merge and only the majority shareholders continue as shareholders of the surviving company; the minority shareholders are involuntarily cashed out of their investment. [8] The dissenters' rights statute serves as the primary assurance that minority shareholders will be properly compensated for the involuntary loss of their investment. The remedy protects the minority shareholders ex ante, by deterring majority shareholders from engaging in wrongful transactions, and ex post, by providing adequate compensation to minority shareholders. Wertheimer, supra, at 680. In this case, the sole purpose of the merger between Holding Company and Merger Corp. was to cash out minority shareholders, such as Lindoe, who did not qualify to hold stock in an S corporation. [9] The time and price at which Lindoe was cashed out was determined entirely by Holding Company. The purpose of the dissenters' rights statute would best be fulfilled through an interpretation of fair value which ensures minority shareholders are compensated for what they have lost, that is, their proportionate ownership interest in a going concern. A marketability discount is inconsistent with this interpretation; it injects unnecessary speculation into the appraisal process and substantially increases the possibility that a dissenting shareholder will be under-compensated for his ownership interest. An interpretation of fair value that gives minority shareholders less than their proportionate share of the whole firm's fair value would produce a transfer of wealth from the minority shareholders to the shareholders in control. Such a rule would inevitably encourage corporate squeeze-outs. In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997 (Me.1989).