Coming in from the Cold: Reforming Shareholders’ Appraisal Rights in Freeze-Out Transactions

Wednesday, January 1st, 1997 at 12:00 am by Alexander Khutorsky
Alexander Khutorsky, Coming in from the Cold: Reforming Shareholders’ Appraisal Rights in Freeze-Out Transactions, 1997 Colum. Bus. L. Rev. 133

In the not too distant past, the law of most states required the unanimous consent of shareholders before significant corporate action could be undertaken. Over time, the potentially tyrannical power of the minority was slowly diluted and today’s corporations are now virtually free from the shackles of the minority veto. Perhaps the most dramatic evidence of this evolution appears in the area of “freeze-out” transactions. Once believed to be anathema to the principles underlying the corporate form, the freeze-out of minority shareholders from continued participation in the corporate enterprise is now recognized by state legislatures and courts. Struggling to balance the diminishing rights of minority shareholders against the encroaching rights of the majority, states constructed appraisal rights designed to insure frozen-out shareholders a fair price for their equity stakes. This Note argues that appraisal rights interfere with the effectiveness of traditional fiduciary duties owed minority shareholders which could otherwise insure fair price and greater access to the courts for dissenters than currently available under appraisal rights statutes. Part II examines the history of freeze-out transactions and the courts’ evolving approaches to protecting the minority shareholder with respect to these transactions. Part III analyzes and critiques existing appraisal rights statutes. Part IV discusses the role of independent directors within a corporation and why they are an insufficient safeguard against unfairness to minority shareholders. Part V proposes two alternatives to deal with the problems inherent in the status quo. The first alternative argues that, but for the existence of appraisal rights statutes, minority interests would be better secured through recourse to the courts of equity. That alternative is ultimately rejected because of the significant benefits inherent to the very structure of a statutory scheme. The favored alternative addresses the identified problems with the appraisal rights statutes and advances reforms through the legislative process.

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