What are appraisal rights?

Say Woodgrove buys Litware for $50.00 a share in cash. Litware traded at $38.00 before the deal and trades at $48.00 now.

A Litware holder who thinks $50.00 is too low can seek appraisal. If the holder follows the steps, a court can then set the shares' fair value.

That value can come out above or below $50.00. The holder gets the court's figure, not the deal price, usually only when the case ends.

Holders who don't seek appraisal are paid the $50.00 after closing, as usual.

State law decides, so the rules differ by state. Many US public companies are incorporated in Delaware, so this page follows Delaware law.

In Delaware, a cash merger usually gives holders appraisal rights, even for shares listed on an exchange.

A deal paid only in listed shares usually doesn't. Adding cash, beyond small amounts for fractional shares, brings the rights back.

They also cover shares not tendered in a cash tender offer, when a merger follows it.

The company must tell holders when the rights are available. Before a vote, it must do so at least 20 days before the meeting.

For a deal put to a vote, the steps run in this order:

1. 1

   A written demand

   Before the vote, the holder delivers a separate written demand to the company. A vote or proxy against the deal doesn't count as one.

2. 2

   No vote for the deal

   The holder votes against, abstains or doesn't vote. A vote for the merger ends the right.

3. 3

   The shares are kept

   The holder keeps them from the demand through the closing. Selling them ends the right.

4. 4

   A petition to the court

   Within 120 days after the merger takes effect, a holder or the company must file one with the Court of Chancery.

5. 5

   The court decides

   It sets fair value and usually adds interest. The case can take years.

A holder whose shares sit at a broker can make the demand in their own name, with proof of ownership. The demand must also name the registered holder and give an address for notices.

Within 60 days after the merger takes effect, a holder can usually withdraw the demand and take the deal price. Later, it needs the company's written approval.

For listed shares, in most mergers, the court dismisses the case unless enough shares seek appraisal: over 1% of the class, or over $1 million at the deal price.

The court values the shares as of the day the merger takes effect, from all relevant factors. It leaves out any value that comes from the merger itself.

So gains the buyer expects from combining the two companies don't count. Fair value can come out above, at or below the deal price.

The company pays the award. Interest usually runs from the day the merger takes effect until payment, at 5 percentage points above the Federal Reserve discount rate, compounded quarterly.

The company may pay holders some cash early. Interest then runs only on what is still owed.

Hewlett-Packard bought Aruba Networks for $24.67 a share in cash. The deal closed on May 18, 2015.

Some holders sought appraisal. In court, they argued the shares were worth $32.57 each.

In April 2019, Delaware's Supreme Court set fair value at $19.10 a share, plus any interest due. It took the deal price and removed the share of the merger's expected gains built into it.

That was $5.57 a share below the deal price, before interest, almost four years after the closing.

The checklist reads Available or Not available, as the filings say. The list's tags read Appraisal rights or No appraisal rights.

The demand has a deadline: see appraisal demand deadline.