Dissenter’s Rights in Washington State
Minority shareholders in any company may not always agree with the majority. In many states, including in Washington, state law grants those minority shareholders (and members) certain “dissenter’s rights” that allow them to avoid being coerced by the majority shareholders into a “less than good for the minority shareholder” deal. Particularly, when a minority shareholder in a corporation or minority member in a limited liability company thinks that a company is worth more than the agreed price in a sale or merger, that shareholder or member may exercise its dissenter’s rights and demand fair value for its share of the company. In these cases, the court determines fair value and the acquiring company is required to pay that amount to the dissenting shareholder or member. Today’s post explains dissenter’s rights in Washington:
What are a minority shareholder or a minority member’s dissenter’s rights?
Dissenter’s rights, also referred to as appraisal actions, come into play when a shareholder of a corporation or a member of an LLC dissents from a specific transaction—usually a sale or merger of the company—and petitions the court to determine what the “fair value” of their ownership is. The dissenter is not required to take the sales price agreed to by the majority when he or she dissents. Instead, the dissenter is entitled to a price for their share that is whatever the court deems “fair value.” This appraisal action is commonly referred to as a shareholder or member’s right to dissent.
What can members or shareholders dissent to?
Under Washington state law, members of LLCs and shareholders of corporations have different rights to dissent:
In Washington State, RCW 25.15.471 governs an LLC member’s right to dissent. Under this code, a member of a limited liability company may only dissent to the amount offered to the member for his or her interest in the company as part of a merger. The member may challenge a merger itself, but only if the merger fails to comply with the procedural requirements of the RCW, fails to comply with the limited liability company agreement, or is fraudulent. If the member is unsuccessful challenging on those grounds, the member may also reject the value that is offered for their share of the company and seek fair payment for their interest in the LLC by exercising their dissenter’s right. The RCW also states that these rights to dissent may be altered by the LLC agreement. While the RCW only provides an opportunity to dissent to mergers, other states allow a member to dissent any time the LLC enters into a transaction that would alter the character of the member’s interest, such as a sale of the company’s assets or conversion into another kind of entity.
In Washington State, corporate dissenters have many more opportunities to dissent and seek fair value for their shares than members of an LLC do. Under RCW 23B.13.020, a shareholder may seek fair value for their shares in the event of (1) a merger, (2) a share exchange, (3) a sale, lease, exchange, or other disposition of all of the corporation’s property and assets, (4) an amendment of the articles of incorporation that effects a redemption or cancellation of the shareholder’s shares, (5) anything else that the shareholder is entitled to dissent to pursuant to the articles of incorporation, bylaws, or a board resolution, (6) an entity conversion, or (7) in the case of a social purpose corporation: (a) becoming an SPC, (b) changing from an SPC to another kind of entity, or (c) amending the articles to change one or more of the social purposes of the company.
Why exercise your dissenter’s rights?
The point of dissenting to a merger or sale transaction is to ensure that members and shareholders are properly compensated for their ownership in a company. Once a shareholder or a member has dissented, the court will determine the fair value of his or her shares or ownership in the company. The shareholder or member will then be paid that “fair” amount as opposed to what was originally offered in the transaction. The court will often evaluate the transaction and the fundamentals of the company’s business to determine the present fair value of the company’s stock. That being said, because the court is not required to recognize the sales price as a floor to the appraisal, a shareholder or member’s ownership could also end up valued lower than the price offered in the transaction.
Dissenter’s Rights Developments
Two major cases brought attention to corporate dissenters’ rights when the court awarded dissenters significant premiums over the acquisition price. In Albertsons’ 2015 acquisition of Safeway, Inc., dissenters received a 26% premium over the acquisition price, resulting in payments of over $127 million. The dissenters argued that Safeway’s valuation was too low and that the company’s board did not fulfill its fiduciary obligations to secure the best deal possible for shareholders. Similarly, the Delaware Chancery Court granted a 20% premium to dissenters in Dell’s 2015 going-private transaction because the court found that the sale process was not a reliable price discovery tool since it was not an arms-length transaction. Therefore, the deal price was given no weight and the court determined fair value using its own valuation method. This resulted in an estimated $148 million awarded. These cases brought dissenter’s rights into the public eye.
Although dissenting provides fair compensation for members and shareholders, there is one major downside for publicly traded companies: it leaves them vulnerable to appraisal arbitrage. Appraisal arbitrage is when shareholder activists or hedge funds acquire a target company’s shares after a merger is announced, oppose the deal, and then seek appraisal. On the one hand, critics of appraisal arbitrage argue that it hinders otherwise constructive transactions and that buyers will offer less in anticipation of capital they might lose in an appraisal action. On the other hand, proponents of appraisal arbitrage argue that it ensures fair value for shareholders.
Despite its potential drawbacks, member and shareholder’s rights to dissent are not going anywhere. Most states have enacted dissenters’ rights laws similar to those in Washington State, and members and shareholders have taken note of how to assert these rights.
If you’d like to learn more about dissenter’s rights or Washington business law generally, please contact us.
*Thanks to Melanie Notari for her significant assistance researching and drafting this blog post.