When the Delaware legislature recently struck down fee-shifting bylaws — those internal corporate laws that force losing plaintiffs to pay the company’s legal fees — it prompted a slew of commentary (e.g., here and here) suggesting Delaware may lose its place as the top venue to incorporate. Nevada has been making a play to provide a Delaware-style business-friendly climate. (See “Delaware’s loss of certainty could be Nevada’s gain.”) Whether Nevada supplants Delaware as the leading corporate venue remains to be seen. But it got us thinking — what does appraisal rights litigation (called “dissenters’ rights” in Nevada) look like for professional investors in Nevada corporations? As it turns out, Nevada is not nearly as friendly a place as Delaware for professional investors whose shares are at risk of being cashed out for an amount below the going-concern value of their investment.
First and foremost, holders of securities in an exchange-listed Nevada corporation without a controlling shareholder (10% or greater) are not entitled to dissenters’ rights at all. Nevada law allows for exceptions where the articles of incorporation provide otherwise or at least part of the merger consideration is not cash or shares of most kinds of corporate stock, but by default there are no appraisal rights. In contrast, Delaware appraisal rights are generally available in a consolidation or merger for any series or class of stock.
Moreover, an investor still needs to clear several hurdles to get an appraisal claim before a Nevada judge. Indeed, the investor and the corporation need to exchange three separate notices before a dissenter’s petition is even filed in court. Initially, investors wishing to dissent from a merger or other business combination subject to appraisal rights must first, before the merger vote, deliver a written notice. Investors must also be sure not to vote their shares in favor of the merger or consolidation.
The shareholder’s notice prompts a response from the subject corporation, to which the investor must respond by (i) demanding payment, (ii) certifying that he or she was actually a beneficial owner, and (iii) surrendering his or her stock certificates as formal evidence of stock ownership. The company is then required to tender payment to the shareholder of an amount that it considers to be the fair value of the shares. The company is highly incentivized to follow this procedure — if it does not, only then may an investor file its action directly and, if the investor prevails, he or she is entitled to recover the expenses of the lawsuit.
Presumably, the corporation’s payment will be insufficient. But even then, an investor cannot go directly to a judge. Instead, the investor has to object in writing and make a demand for what he or she thinks is the fair value of the shares. Only then, with the payment demand unsettled, will a petition be filed in court. Also, it is the company — not the investor, as in Delaware — that files the petition, and the company can wait two months to do so.
Two other considerations bear mention. First, unlike Delaware, Nevada does not provide for an interest rate floor on appraisal awards (Delaware appraisal awards accrue at 5% above the Fed’s discount rate and are compounded quarterly). Nevada law instead says that a dissenter’s award will be for fair value “plus interest.” Second, there are very few decisions interpreting Nevada’s dissenters’ statute, making litigation in Nevada much more unpredictable for investors and companies alike.
Accordingly, professional investors who utilize appraisal rights to maximize their investment returns will not cheer on Nevada to supplant Delaware as the seat of American corporate law.