When a Delaware corporation merges or consolidates with another company, shareholders can petition the Delaware Court of Chancery to appraise the value of their shares.  This post will address a shareholder’s right to request judicial appraisal of such shares of a Delaware corporation that is a party to a merger consolidation.

What Mechanism Can Shareholders Use To Appraise Their Shares in a Corporation That Is a Party to a Merger or Consolidation?

Section 262 of the DGCL provides appraisal rights to the holders of record of shares of any corporation that is a party to a merger or consolidation, subject to specified exceptions and to compliance with specified procedural requirements.

What Are Some of the Requirements To Making a Request for Appraisal of Shares Pursuant to Section 262 of the DGCL?

• Shareholder must have continuous record ownership of the relevant shares from the date of the demand for appraisal through the effective date of the merger.

• Shareholder must not vote in favor of the merger or consent to it in writing.

• Shareholder must make delivery of a written demand for appraisal prior to the taking of the stockholder vote on the merger.

• Shareholder must file a petition with the Delaware Court ofChancery within 120 days after the effective date of the merger.

What Are the Exceptions to the Availability of Appraisal Rights Under Section 262?

Exceptions to the availability of appraisalrights include the denial ofappraisal rights when:

1) the merger does not require the approval of the stockholders of such corporation; and

2) shares of any class or series are listed on any national security exchange or held of record by more than 2,000 holders.

These exceptions do not apply in certain circumstances, however.

Are Appraisal Rights Available to Shareholders of a Subsidiary of a Corporation That Is a Party to a Merger or Consolidation?

Yes, if all of the stock of such subsidiary corporation is not owned by the parent immediately prior to the merger.

How Does the Process Work for Obtaining an Appraisal of Shares?

After filing a petition under Section 262 demanding appraisal of shares, the surviving corporation must file with the Court a list of the names and addresses of all stockholders who have demanded payment of fair value for their shares and with whom agreements regarding such value have not been reached.

Thereafter, the Court will hold a hearing on the petition and determine the stockholders who have properly perfected their appraisal rights under Section 262. At the hearing, the Court will determine the “fair value” of the shares as well as the fair rate of simple or compound interest, if any, to be paid upon such fair value. Following this determination, the Court will order the surviving corporation to pay the dissenting shareholders the applicable amount.

How Are the Shares Valued by the Court?

Under Delaware law, an appraisal petitioner is entitled to receive a proportionate share of fair value in the going concern on the date of the merger. The Court of Chancery considers proof of value of the shares by any techniques or methods that are generally considered acceptable in the financial community and otherwise admissible in Court, and nearly always utilizes some type of discounted cash flow methodology.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.