Appraisal Rights - Explained
What are Appraisal Rights?
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Table of ContentsAppraisal Right DefinitionA Little More on What is Appraisal RightsValuation Methods Used In Appraisal RightAcademic Research
What are Appraisal Rights?
Appraisal right refers to the legal right which allows small shareholders in a corporation to request the purchase of their shares at the nominal value as decided by an independent valuator. The valuator analyses the worth of the company shares, and whatever he or she comes up with becomes the primary selling price; thus, acquirers are required to repurchase stocks at this new value. Appraisal rights act as a protection in the case of a merger or an acquisition, ad it avoids a circumstance where a firm is sold below their actual worth.
How Do Appraisal Rights Work?
When coming up with a new value for the company's shares, valuators employ different methods that they use in deterring what is fair in terms of stock prices, as well as the general value of the company. Some of these valuation methods include the asset-based method (the company's liabilities is subtracted from their assets), the income or cash flow model (the potential future cash flow of the firm), and a mixture of other formulas. Appraisal rights provide compensational guarantees to shareholders in a case where a merger or acquisition overrides their best interest. Less commonly, appraisal rights are used when shareholders feel that a company is not performing efficiently even when there is no expected merger or acquisition.
Valuation Methods Used In Appraisal Right
There are many ways in which a company's value can be determined, and some of them are listed in the section above. The most commonly used method is the asset-based method which calculates the net asset value of a company. When using this valuation method, there are different factors that determine what assets and liabilities to add in the valuation, and how to calculate each of their value. LIFO or FIFO, two widely used inventory cost valuation method have different techniques which they use in appraising a company, thus providing different results. Another widely used model of company valuation is the comparable earnings ratio, like the Price-to-earnings (P/E) ratio. This method compares a firm with its competitors and uses the result to check if the firm is undervalued or over-valued. For instance, if Firm A has the highest P/E among all its competitors in the SaaS industry, it either means that the company has some sort of expertise or has an air of command and intelligence that the rest do not possess, or it is simply overpriced. For the latter, Firm A might just have a higher cost compared to their nominal returns. The third method featured in this section is the discounted cash flow or income valuation model. This method is mainly used in analyzing the value of a company's stock, although it can be applied to measuring the worth of the firm as a whole, it is rarely used for that purpose. The Discounted Cash Flow Method (DCF) places a price on a firms stock by analyzing the possible performance of the firm in the near future. While it has mathematical and historical calculations, it is mostly guesswork, as past performance does not reflect future occurrence.
Academic Research on Appraisal Rights
- Exclusiveness of the Dissenting Stockholder'sAppraisal Right, Vorenberg, J. (1964). Exclusiveness of the Dissenting Stockholder's Appraisal Right.Harvard Law Review, 1189-1217. To give minority stockholders a measure of protection when they object to basic corporate action which those in control of a corporation propose to take, states have enacted statutes which permit shareholders who dissent from such action to require the corporation to buy their shares at an appraised price. Important questions arise as to the extent to which this statutory scheme of protection fore-closes other lines of attack on the proposal. In this article Professor Vorenberg suggests that the appraisal remedy should not provide a license to the majority to "freeze out" a minority shareholder absent a valid business purpose for the transaction. He then explores whether the availability of appraisal is given any weight in judicial scrutiny of transactions which minority stockholders are seeking to enjoin on the basis that the proposed terms are not fair to them. He concludes that in view of the minority's alternative of seeking appraisal, the majority should not have the burden of establishing the substantive fairness of such terms.
- The advent of arightto housing: a currentappraisal, Michelman, F. I. (1970). The advent of a right to housing: a current appraisal.Harv. CR-CLL Rev.,5, 207.
- The appraisal remedy in corporate law, Fischel, D. R. (1983). The appraisal remedy in corporate law.American Bar Foundation Research Journal,8(4), 875-902. In corporate law the appraisal remedy gives shareholders the right to dissent from types of corporate transactions and to obtain payment for their shares from the corporation. While the remedy is typically viewed as a form of protection for minority shareholders, the author argues that it is best understood as an implied contractual term that increases the value of all shares.
- Squeeze-out mergers and the new appraisal remedy, Thompson, R. B. (1984). Squeeze-out mergers and the new appraisal remedy.Wash. ULQ,62, 415.
- Accrued Dividends in Delaware Corporations. From Vested Right to Mirage, EMD. (1944). Accrued Dividends in Delaware Corporations. From Vested Right to Mirage.Harvard Law Review, 894-899. EMD. (1944). Accrued Dividends in Delaware Corporations. From Vested Right to Mirage.Harvard Law Review, 894-899.