Under various forms of state legislation, dissenting shareholders of a corporation are entitled to the right to receive a cash payment for the fair value of their shares, in the event of a share-for-share merger or acquisition to which the shareholders do not consent. Dissenters' rights allow dissenting shareholders an easy way out of the company if they do not want to be a part of the merger.
Breaking Down Dissenters' Rights
Prior to this legislation, mergers and acquisitions required a unanimous vote in favor from the shareholders of the company. This allowed for just one dissenting shareholder to veto the merger or acquisition, even though it may have been in the best interest of the company. State legislation took away this right, but in turn, gave the shareholders the right to receive the cash payment for their shares instead.
Although dissenting rights have eased a number of the obstacles to a corporate transaction, they're still not without their hiccups.
For instance, while the day-to-day operations of a corporation, and even the policies governing its ongoing operations, are generally left to the corporation's officers and directors, any "extra-ordinary" matter — such as a merger or consolidation — must be approved by the corporation's shareholders.
If the necessary majority of the corporation's shareholders approve a merger or consolidation, it will advance, and the shareholders will receive compensation. However, no shareholder who votes against the transaction is required to accept shares in the surviving or successor corporation. Instead, he or she may exercise appraisal rights.
Under appraisal rights, a dissenting shareholder who objects to an extraordinary transaction (such as a merger or consolidation) may have his or her shares of the pre-merger or pre-consolidation corporation appraised (valued), and be paid the fair market value of his or her shares by the pre-merger or pre-consolidation corporation.