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Appraisal Rights

Updated: March 28, 2023
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Appraisal rights allow shareholders of a publicly-traded corporation to challenge the amount received after a merger, acquisition, or other transaction. If you're an investor in a company facing a stock sale, you may be concerned that your investments will be undervalued and that you'll be short-changed.

Appraisal rights can offer some added protection against this happening. Read on to learn more about appraisal rights and what to consider before exercising them.

What Are Appraisal Rights?

Appraisal rights allow investors to demand an independent valuation of their stock from an impartial appraiser if they disagree with the sale price offered. They are the legal ability of a company's shareholders to challenge their stock's fair market value in situations such as mergers and acquisitions, getting bought out, or other corporate changes.

Assets Covered in Appraisal Rights

Appraisal rights are available for many assets, including shares, debt, intellectual property, real estate, and other tangible assets. Each jurisdiction will have its specific definition of what is or isn't considered a right appraisal asset. Generally speaking, if a company intends to complete a buyout or merger transaction that affects the shareholders, appraisal rights may be available.

Appraisal rights generally apply to the sale of corporate assets, including shares of stock. Appraisal rights are often extended to shareholders of a company during a merger or other ownership change, allowing them to file an objection with the court if they don't agree with the values placed on their shares by the acquirer. The objective is for shareholders to receive fair compensation for the value of their investments.

Appraisal Rights Eligibility

Appraisal rights are available to company shareholders during a merger or other ownership change. Generally, shareholders who hold at least 5% of the company's outstanding shares have the right to exercise appraisal rights. To receive favorable consideration, the shareholder must file a prior notice with the court and prove that they acted in good faith in purchasing or holding shares in the company when it was acquired.

Generally, to be eligible to exercise appraisal rights, shareholders must still be a stockholder at the time of closing of the transaction. Also, they must have continuously held their shares for at least the date that is 20 days before the date on which the initial public announcement of the corporate transaction occurred.

Furthermore, there may also be other eligibility requirements attached depending on the specific trade or state laws. Certain stockholders may be excluded from eligibility for appraisal rights even if they meet the abovementioned criteria.

Legal Procedures in Appraisal Rights

To exercise appraisal rights, the stockholders must provide their consent in writing. They may do this by signing a document known as an "Appraisal Rights Exercise Agreement" or by making a written request directly to the appointing attorney of the corporation.

The agreement should include information about the number of shares held and state that the person is eligible for appraisal rights under applicable law. Once the request has been submitted, it must be filed with either a court of law or with the jurisdiction's Secretary of State for appraisal rights to take effect.

How Value is Determined in an Appraisal Proceeding

The value of the stock owned by shareholders will be determined during the appraisal proceedings. A court may assign a team of experts to analyze the company's financial records, assess its assets, and review any other pertinent information to come up with an accurate valuation. In some cases, the court may rely on testimony from securities analysts or industry professionals. Ultimately, the court will make a final determination as to how much each shareholder is entitled to for their ownership stake.

Valuation Methods Used in Appraisal Rights

Appraisal rights are an important tool for investors to understand the true worth of a business. To determine this, several valuation methods are used, which can have a significant effect on determining the appraisal rights. Explore below the various tactics appraisers use to calculate a fair market value.

  • Asset-Based Approach

    The asset-based approach in valuation involves analyzing the assets of a business and appraising their potential value. This method is favored for its ability to reach a tangible appraisal of the market's worth, as it considers all monetary elements. This type of appraisal considers all resources, such as inventory, property, equipment, accounts receivable, and other tangible items that have value.

  • Market-Based Approach

    The market-based approach is slightly different from the asset-based approach, as it captures the cost elements when transferring an ownership interest. This method emphasizes research and looking at what similar businesses are worth to determine an estimable price tag for the particular business.

  • Income-Based Approach

    The income-based approach looks at the value of a business based on its ability to produce income and generate cash flow. This generally focuses on the outgoing expenses versus the incoming revenue to determine net income or return on investment. This methodology is most commonly used when there are concerns about potential risk and long-term growth opportunities for an individual's ownership position.

  • Comparable Transactions Method

    Another popular method for valuing companies is to examine the purchase price based on certain variables such as size, industry, transaction type, and debt amount. By comparing similar acquisitions in pricing, investors can better understand what their business is worth relative to others in their industry.

  • Discounted Cash Flow Valuation

    Investors can examine the actual worth of a business as opposed to its perceived worth/market value, which may be inflated or deflated due to market conditions and public opinion. The discounted cash flow analysis assigns a value to a company based on the overall expectation of future cash flow.

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Appraisal Rights Tips

  • Small businesses may have additional considerations when it comes to exercising appraisal rights. For instance, if the company is a closely held corporation with fewer than 500 stockholders or is a subsidiary of a giant corporation, the participants in a potential buyout may be precluded from seeking appraisal rights altogether.

  • Some states provide laws that give shareholders special rights in the event of a buyout or change of control. It's important to consult with an attorney and determine which state laws apply to your situation.

  • Before you decide to exercise your appraisal rights, it's important to consider all factors at play. Even if the company is being sold for a price that you feel is too low, there are costs associated with exercising appraisal rights. These include legal and accounting fees as well as the postponement of receipt of payment.

  • Relying on experts to value a company may not be an exact science, and the court can arrive at a figure much lower than expected. As such, you should weigh the risks before asserting your appraisal rights.

Key Terms

  • Appraisal Rights Exercise Agreement: The Appraisal Rights Exercise Agreement is a document that outlines the process of exercising appraisal rights, which gives shareholders the right to object to certain mergers and acquisitions.
  • Stakeholders: Stakeholders are any individuals or entities with interest in a particular company, such as shareholders, creditors, employees, customers, and vendors.
  • Shares: They are units of ownership interest in a company and represent the individual's proportionate ownership stake.
  • Intellectual Property: Intellectual property is the legal right that gives creators exclusive control over the use and distribution of their creations.
  • Acquisition: Acquisition is buying or merging with another company to gain control over its assets, customers, and markets.
  • Merger: A merger of two or more companies joining hands, whereby the assets, operations, and stock of the companies are unified under a single entity.


Appraisal rights are important in protecting your assets against a potential corporate transaction. It is important to be aware of these rights, as they can provide valuable means of challenging corporate decisions if necessary. By understanding the details of appraisal rights and how they work, you can ensure that your interests are protected in any corporate transactions. Appraisal rights are important in protecting your assets against a potential corporate transaction.

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Shareholders of a publicly-traded corporation have appraisal rights. These rights allow them to challenge the amount they receive in connection with a corporate merger, acquisition, or other transaction.

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