Rights of Dissenters under the Pa. Business Corporation Law

Monday, 22 August 2016 14:07 Written by  Bill MacMinn

Reprinted with permission from the August 19, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

The rights of shareholders to dissent to corporate actions are set forth in PA C.S.A. §1571 et seq., the Pennsylvania Business Corporation Law. Dissenters who comply with the formalities of the statute have the right to demand payment for the fair value of their stock interest at the time of the corporate action giving rise to the right to dissent – provided the corporate goes through with that action. Since a shareholder in a publicly traded company can simply sell his shares if he disagrees with a proposed corporate action, dissenters’ rights do not apply to such corporations.

What triggers dissenters’ rights?
The corporate actions giving rise to dissenter’s rights are specified in the BCL and generally involve fundamental changes to the entity, such as a merger or a change in voting rights.   When the corporation proposes to undertake such a change, a specific procedure must be followed by the dissenting shareholder.

Dissenters need not necessarily assert their dissenters’ rights to all of their shares. They must, however, assert those rights as to “all the shares of the same class or series beneficially owned by any one person.” Beneficial owners of shares should have the written consent of the record holder of the shares.  15 PA C.S.A. §1573.

Dissenters must file their dissent with the corporation prior to the vote on the proposed corporate action. The dissent must be in writing and must include a demand for payment of the “fair value for his shares” if the corporation adopts the proposed action.  Merely abstaining or voting against the change is not sufficient to invoke dissenters’ rights. Once invoked, to preserve dissenters’ rights, the shareholder cannot change the beneficial ownership of the shares while the vote is pending, nor can he vote in favor of the proposed action.

What is the procedure?
The shareholder and the corporation must comply with the following provisions of the dissenters’ rights provisions of the Business Corporation law before any disputes can be submitted to the Court.

• Notice to demand payment. Section 1575 of the BCL sets forth the duties of the corporation to provide notice to dissenters of corporation action passed over shareholder dissent. The notice should set forth where, when, and how dissenters can demand payment. Notice to demand payment, 15 PA C.S.A. §1575.

• Failure to comply with notice to demand payment, etc. Section 1576 of the BCL details what happens if the shareholder does not properly demand payment for shares after a dissent.  Failure to comply with notice to demand payment, etc., 15 PA C.S.A. §1576.

• Release of restrictions or payment for shares. Section 1577 of the BCL identifies what happens if the proposed corporate action, for example – the merger, was not approved.  If the proposed corporate action was approved and put into effect, the corporation must remit the fair market value of the shares along with the corporation’s written estimate of the valuation – or a notice that no remittance is due. If no remittance is paid, the corporation must comply with additional formalities. Release of restrictions or payment for shares, 15 PA C.S.A. §1577.

• Estimate by dissenter of fair value of shares. Dissenters who disagree with the corporation’s estimate of value or the corporation’s failure to remit payment must then send the corporation their own estimate. Failure to do so within a thirty-day period binds the shareholder to the corporation’s estimate. Estimate by dissenter of fair value of shares, 15 PA C.S.A. §1578.

• Valuation proceedings in the Court. If there is no agreement on share value, the corporation may request, pursuant to Section 1579, that the Court determine the value of the disputed shares.  If the corporation fails to file a claim with the Court, the dissenter may file his own claim – after the statute’s time limits are met. Valuation proceedings generally, 15 PA C.S.A. §1579.

  • Right to a court appraisal. Under Section 1579 of the Dissenters’ Rights Act, the Court can appoint an independent appraiser to “receive evidence and recommend a decision on the issue of fair value.”
  • Interest. The statute also holds that dissenters have the right to collect interest in addition to the fair market value of the shares. Valuation proceedings generally, 15 PA C.S.A. §1579.
  • Costs and expenses. Generally, the corporation pays for the court costs including the costs of the appraiser unless the Court believes the dissenter acted in bad faith, to delay the matter, or for other inappropriate reasons. Costs and expenses of valuation proceedings, 15 PA C.S.A. §1580.
  • Counsel fees. The Court has discretion in awarding payment of counsel fees. The corporation can be required to pay if it failed to substantially comply with its obligation under the Dissenters’ Rights provisions. Dissenters can be required to pay if they are found to have acted in bad faith. Costs and expenses of valuation proceedings, 15 PA C.S.A. §1580.

How does the Court resolve the valuation question?
As with many legal disputes, the value of the shares is determined by a battle of the experts. In a typical case, the trial court, as mentioned, appoints its own expert. The shareholder and the corporation may also offer their own experts whose testimony may range from a critique of the value opinion offered by the Court’s expert to a full-blown independent valuation of their own. 

Issues with appraisal testimony are legion, beginning with the methodology used -market approach, income approach or asset approach- to underlying issues within each approach such as the appropriate capitalization rate; the comparable transactions examined; the treatment of specific assets such as cash, accounts receivable, fixed assets, and accounts payable; the anticipated growth rate; and the list goes on and on.

The dissenting shareholder is entitled to “fair value” for his shares. How does the concept of fair value, used in the statute, differ from fair market value? In a fair market value analysis, discounts for lack of control and lack of marketability are applied.  The former discount adjusts for lack of control over the business entity, while the latter adjusts for a lack of a ready market of buyers for the shares.  In business appraisal terms, fair value does not incorporate these concepts. The law is not as clear. As one Court observed, the term “‘fair value” is hardly self-executing in its clarity”. The Court went on to explain that the”… object of an appraisal proceeding is to determine the value of the dissenter's shares on a going concern basis” which the Court described as the “true or intrinsic value”. In so doing, the Court said, all  factors and elements having an effect on value should be considered.  While it would seem that the extent of the dissenter’s ownership interest and the lack of a ready market to sell that interest are two such relevant factors.  In a case in which the author was recently involved, the Court, lacking clear appellant guidance, refused to apply those discounts. 

The Business Corporation Law provides an exit for a shareholder who disagrees with a fundamental or other qualifying action taken by the corporation. Strict compliance with the statute is required, but if complied with, the statute affords the shareholder the ability to cash out his interest.

William MacMinn is Managing Partner with Antheil Maslow & MacMinn,   His practice focuses primarily on Commercial Litigation, Personal Injury, Products Liability, Employment Litigation, Estate Litigation and Real Estate law.

Last modified on Monday, 22 August 2016 14:31
Bill MacMinn

Bill MacMinn

Bill concentrates his practice in the area of litigation, including Commercial Litigation, Personal Injury, Products Liability, Employment Litigation, Estate Litigation, Real Estate, and Arbitration. He represents a broad spectrum of individuals, corporations and institutions in commercial, employment litigation, collection, construction and personal injury actions. He has expertise in a wide variety of venues in Bucks and surrounding counties, and in the United States District Court. Bill also has extensive experience in Alternate Dispute Resolution forums, including participation in the American Arbitration Association, private arbitrations and private court systems. He is frequently appointed as arbitrator.

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