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What are Appraisal Rights?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 01 December 2016
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    Conjecture Corporation
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Appraisal rights are rights available to minority stockholders who do not agree with a major action such as a merger being undertaken by the company they hold stock in. These shareholders can vote against the action and then file to exercise their right of appraisal, which obliges the company to buy back their stock at a rate determined by a third party valuator. The right of appraisal is provided to investors in many regions of the world by law in response to concerns about the rights of minority shareholders.

Historically, all shareholders were created equal, to some extent, and a unanimous vote was needed for actions such as mergers. The law was later changed, allowing majority shareholders to dictate the future direction of the companies they invested in. For minority shareholders, this could mean being dragged along with a decision which they opposed or did not want to be a part of. As a result, the concept of appraisal rights was developed.

Under appraisal rights, stockholders who oppose a merger have the right to request that a third party determine the value of the stock. Using this appraisal, the company must buy back the stock from investors who want to withdraw from the company's pool of stockholders. The appraiser assesses the value of the stock as it would have been before the merger.

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There are a number of reasons why people might be opposed to a merger and wish to use their appraisal rights. For example, people with shares in a company which is rapidly growing might resent a merger with a company which is not experiencing a high rate of growth, arguing that the rate of return on their stocks will decline. People may also feel that a merger is not in the best interests of a company or that it conflicts with the company's stated goals. Investors concerned about ethics may also not want to be associated with companies which they feel violate ethical standards.

In order to exercise appraisal rights minority shareholders must vote against corporate actions to which they are opposed and file to indicate that they intend to exercise their right of appraisal. People cannot decide after the fact that the merger is unfavorable and force the company to buy back their stock at the appraised value, for example. The specific steps which need to be taken can vary depending on the region and it is advisable for shareholders to familiarize themselves with the appraisal rights process if they are concerned about an upcoming merger.

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