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56 U. Mich. J. L. Reform Caveat [1] (2022)

handle is hein.journals/caveat56 and id is 1 raw text is: Shareholder Appraisal Rights: Delaware's Flawed Market-Out Exception Lynn Bai* and William A. Murphy* September 2022 Abstract State statutes give dissenting shareholders an appraisal right in some, but not all corporate mergers. With varying specifics, a widely adopted market-out exception denies appraisal if the shares are publicly traded. The rationale for market-out is that the public market offers a reliable valuation of the shares and a convenient exit to dissenting shareholders. A major criticism of market-out is that market prices may not reflect the full value of the shares due to information asymmetry in mergers involving conflicts of interests. Delaware's market-out approach is drastically different from that adopted by the Model Business Corporation Act (MBCA), but both have a significant number of followers among US jurisdictions. This essay highlights the flaws in Delaware's approach and shows that the MBCA provides better protection to dissenting shareholders. Fiduciary breach lawsuits are not adequate substitutes for appraisal due to procedural hurdles. Introduction: The Market-Out Exception to Appraisal Rights Historically, certain corporate transactions such as mergers and acquisitions required a unanimous approval by shareholders of the target company. The requirement effectively gave shareholders the power to veto highly valuable transactions.' Modern-day corporate statutes lower that requirement to an affirmative vote by a majority of shareholders.2 Merger terms are set by the management in negotiation with the acquiring company. The majority or supermajority approval means that the merger can consummate even if some shareholders disapprove of the transaction, most commonly because they believe the shares are undervalued or the compensation is in the form of illiquid securities that lack a ready market. What are the options of the dissenting shareholders if they do not have enough shares to block the merger? They could submit to their fate and grudgingly accept the allegedly unfair terms, or they could seek an appraisal in court to determine a fair value for their shares and compel the acquiring company to pay this amount in cash (the most liquid form of compensation). Appraisal proceedings are costly to shareholders because of the need to retain lawyers and financial experts that will argue the merger compensation is unfairly low. The appraisal rights of shareholders of Delaware companies are governed by Section 262 of the Delaware General Corporation Law (DGCL). 1

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