While appraisal is typically a creature of statute, appraisal rights can also be a creature of contract–in particular, when an operating agreement, charter, or similar foundational document provides for them (including when a certificate of designation provides for the value of preferred stock). Many states, including New York, allow the members of an LLC–as an example–to include appraisal rights in the operating agreement. While we often cover appraisal on this blog as a statutory remedy focused on shareholder protection, negotiated appraisal rights can be a part of a corporate lawyer’s suggestion box in trying to get a deal done. A minority investor concerned about his or her minority status may be comforted by an appraisal rights mechanism in the foundational documents. Similarly, an investor who is contemplating a minority investment may wish to negotiate for an appraisal provision precisely because it can give an “out”–and, at minimum, bargaining power–if the minority investor sees issues with an otherwise-aboveboard merger. Because appraisal rights are different than breach of fiduciary duty claims and are a post-closing remedy, the minority investor can also point out that appraisal may be a viable remedy in lieu of filing a lawsuit seeking injunctive relief and attempting to block corporate action. This trade–giving up some rights before the closing in exchange for a post-closing remedy–allows the minority and majority investors to protect themselves while potentially creating value for both in the transaction.

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