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BUSINESS
VALUATION UPDATE
TIMELY NEWS, ANALYSIS, AND RESOURCES
FOR DEFENSIBLE VALUATIONS
Vol. 21, No.2, February 2015
Reprinted with permissions from Business Valuation Resources, LLC
By Gilbert E. Matthews, CFA, and
Michelle Patterson, J.D., Ph.D.
Introduction: public shareholders and
appraisal rights. Appraisal is a right and
a remedy.1 Available by statute in all states,
appraisal provides disgruntled shareholders the
right “to require the corporation to pay them the
‘fair value’ of their shares upon some mergers or
other fundamental changes.”2 Shannon Pratt’s
authoritative treatise points out that “a primary
purpose of appraisal statues is to protect
minority shareholders”;3 they do so by provid-
ing procedures for shareholders to receive a
judicial hearing (an appraisal) wherein the court
assesses the value of their interests using a stan-
dard called fair value. The intention of the court
valuation is to compensate minority shareholders
equitably for the unwanted change in their invest-
ments. Because the objective is to compensate
the minority, the courts employ a valuation stan-
dard called fair value, which is considered to be
a fuller measure of value that can result in an
assessment higher than market price.
1 This article deals with appraisal statutes only. Judicial
appraisal as a remedy is available for causes
of action other than appraisal in various states.
Delaware, for example, provides for appraisal with a
fair value valuation in breach of duciary duty “entire
fairness” cases.
2 Robert B. Thompson, “The Case for Iterative
Statutory Reform: Appraisal and the Model Business
Corporation Act,” 74 Law & Contemp. Prob. 253
(2011). Thompson points out that this is a “policy
provision that does not exist widely outside the
United States.”
3 Shannon P. Pratt, Valuing a Business: The Analysis
and Appraisal of Closely Held Companies, 5th ed.
(McGraw Hill, 2008), p. 916.
Appraisal rights and fair value assessments are
broadly available for shareholders of private
companies. However, 37 states restrict the
appraisal rights of public-company sharehold-
ers through a provision in their appraisal stat-
utes called “market-out exceptions” (also known
as a “market-out” or “market exception”).4 With
varying specics, the statutes deny shareholders
of publicly traded companies the court-assess-
ment and fair value standard to which similarly
situated private shareholders are entitled.
The market-out exception is often seen as com-
pletely denying public shareholders the right of
appraisal. In fact, this view is inaccurate. Many
states have provided exemptions from the public
shareholder market-out provisions, which restore
the right to a court appraisal at fair value. These
complicated exemptions are often confusedly
referred to as “exceptions to the market excep-
tion.” For purposes of clarity, we shall refer to
these exceptions to the market-out exceptions
as “exemptions.”
The importance of the fair value standard
in appraisal. To understand the complexities
of market-out exceptions and their exemptions,
we must start with a discussion of the “fair
value standard” and its importance. Professors
Hamermesh and Wachter conclude that, to
accomplish appraisal statutes’ intent to fairly
compensate dissenting shareholders, the fair
value standard is superior to the alternatives:
4 Ofcial Comments to Model Bus. Corp. Act, §13.01
(2008).
Public Shareholders, Fair Value, and the
‘Market-Out Exception’ in Appraisal Statutes
2 Business Valuation Update February 2015
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
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BUSINESS VALUATION UPDATE
R. JAMES ALERDING
CPA/ABV, ASA
ALERDING CONSULTING, LLC
INDIANAPOLIS, IN
CHRISTINE BAKER
CPA/ABV/CFF
MEYERS, HARRISON & PIA
NEW YORK, NY
NEIL J. BEATON
CPA/ABV, CFA, ASA
ALVAREZ & MARSAL VALUATION
SERVICES
SEATTLE, WA
JOHN A. BOGDANSKI, ESQ.
LEWIS & CLARK
LAW SCHOOL
PORTLAND, OR
ROD BURKERT
CPA/ABV, CVA
BURKERT VALUATION ADVISORS, LLC
MADISON, SD
MICHAEL A. CRAIN
CPA/ABV, ASA, CFA, CFE
THE FINANCIAL VALUATION GROUP
FORT LAUDERDALE, FL
NANCY J. FANNON
ASA, CPA/ABV, MCBA
MEYERS, HARRISON & PIA
PORTLAND, ME
JAY E. FISHMAN
FASA, CBA
FINANCIAL RESEARCH ASSOCIATES
BALA CYNWYD, PA
LYNNE Z. GOLD-BIKIN, ESQ.
WEBER GALLAGHER
NORRISTOWN, PA
LANCE S. HALL, ASA
FMV OPINIONS
IRVINE, CA
THEODORE D. ISRAEL
CPA/ABV/CFF, CVA
ECKHOFF ACCOUNTANCY CORP.
SAN RAFAEL, CA
JARED KAPLAN, ESQ.
MCDERMOTT, WILL & EMERY
CHICAGO, IL
GILBERT E. MATTHEWS CFA
SUTTER SECURITIES INCORPORATED
SAN FRANCISCO, CA
Z. CHRISTOPHER MERCER
ASA, CFA
MERCER CAPITAL
MEMPHIS, TN
JOHN W. PORTER, ESQ.
BAKER & BOTTS
HOUSTON, TX
RONALD L. SEIGNEUR
MBA, ASA, CPA/ABV, CVA, CFF
SEIGNEUR GUSTAFSON
LAKEWOOD, CO
BRUCE SILVERSTEIN, ESQ.
YOUNG, CONAWAY, STARGATT &
TAYLOR
WILMINGTON, DE
JEFFREY S. TARBELL
ASA, CFA
HOULIHAN LOKEY
SAN FRANCISCO, CA
GARY R. TRUGMAN
ASA, CPA/ABV, MCBA, MVS
TRUGMAN VALUATION ASSOCIATES
PLANTATION, FL
KEVIN R. YEANOPLOS
CPA/ABV/CFF, ASA
BRUEGGEMAN & JOHNSON
YEANOPLOS, P.C.
TUCSON, AZ
[T]he “going concern value” standard adopted
by the Delaware courts as the measure of “fair
value” in share valuation proceedings is supe-
rior, in both fairness and efciency, to its two
main competitors, [fair] market value and third-
party sale value.5
The fair value standard in appraisal valuations
is based on equitable concepts of justice and
is used in 47 of the 50 states.6 When the unani-
mous consent requirement for corporate action
was abandoned, it was replaced by the right
to a court appraisal under what is known as
a “fair value” assessment. This broader and
more comprehensive assessment is employed
to award minority shareholders a full measure
of their interests when a major change in their
investment—with which they disagree—takes
place. It serves to compensate objecting inves-
tors who are forced out or “squeezed out” of the
enterprise or, alternatively, locked into an illiquid
investment materially different from the one in
which they had invested. Fair value is measured
by the “going concern value” of the enterprise.7
A fuller measure of the minority’s interest is
afforded because no discounts are permitted for
minority status, lack of marketability, or illiquid-
ity. In addition, going concern value (fair value)
includes in its valuation opportunities for value
enhancement that management has anticipated:
[G]oing concern value must include not only the
discounted free cash ow to be generated by
the corporation’s [existing] assets, but also the
discounted free cash flow to be generated by
5 Lawrence A. Hamermesh and Michael L. Wachter,
“Rationalizing Appraisal Standards in Compulsory
Buyouts,” 50 B.C. L. Rev.1021 (2009).
6 “Fair value” is the standard of value in all states
except California, Louisiana, and Ohio, which use fair
market value. Wisconsin uses “fair market value” for
business combinations and “fair value” in all other
situations. Most states follow the Delaware denition
of “fair value.”
7 “Fair value” in appraisals is distinct from (and
normally greater than) “fair value” for accounting
purposes as dened in FAS 157; the latter is a form
of fair market value.
February 2015 bvresources.com 3
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
the reinvestment opportunities anticipated by
the corporation.8 (emphasis added)
Fair value differs from fair market value and
from third-party sale value.
It differs from fair market
value, the price at which an
asset would change hands
between a knowledgeable
and willing buyer and a
knowledgeable and willing
seller, which includes dis-
counts for minority interest
and/or lack of marketability,
when applicable. Fair market
value, therefore, is generally
less than the minority share-
holders’ proportionate interest that they would
obtain under fair value.
Fair value differs from third-party sale value
(acquisition value), which is a standard derived
from transactions in which corporate control is
acquired. Integral to third-party sale valuation
are synergistic and change-of-control elements
of value. Most state appraisal statutes expressly
forbid appraisal dissenters to share in the value
of these elements. If dissenters were entitled
to participate in the synergies and change of
control enhancements integral to this standard,
they would receive a value greater than their pro
rata share in the going concern.
Under a third-party sale standard, [dissent-
ing] shareholders would receive a value greater
than fair value. Third-party sale price includes
additional elements of value resulting from the
transaction, such as operating control and
synergistic values. Most appraisal statutes
expressly exclude from fair value any increases
in value resulting from the synergies accom-
plished by the transaction.9 (emphasis added)
The Model Business Corporation Act and
Delaware: appraisal trigger events and mar-
ket-out exceptions. Professor Mary Siegel’s
8 Hamermesh and Wachter at 1022.
9 Id.
2011 consideration of appraisal rights10 in the
Model Business Corporation Act (MBCA)11 con-
trasts the corporate events that give minority
shareholders the right to an appraisal action
under the MBCA and under
Delaware corporate law:
MBCA section 13.02(a) lists
five mandatory appraisal
triggers, each of which
specifically defines events
that require the corpora-
tion to offer its shareholders
appraisal rights: (1) mergers,
(2) share exchanges, (3)
dispositions of assets, (4)
amendments to the articles,
and (5) conversion or domestication. Delaware,
in contrast, mandates appraisal rights only for
some mergers.12
Siegel notes that the MBCA’s ve appraisal trig-
gers, compared to Delaware’s sole availability
for merger transactions, results in the MBCA
offering “more opportunity for shareholders to
demand” their appraisal rights.13 She points out
that “whether increased opportunity to exercise
these rights is good corporate policy depends on
one’s view of appraisal rights and their function.”14
Although the MBCA offers greater opportu-
nity for appraisal rights, it denies these rights
to public shareholders in some circumstances
by including market-out exceptions. The MBCA
has debated over many years the advisability of
denying public shareholders appraisal rights and
10 Mary Siegel, “An Appraisal of the Model Business
Corporation Act’s Appraisal Rights Provisions,” 74 J.
of Law and Contemporary Problems 231 (2011).
11 The American Bar Association’s Model Business
Corporation Act is a model code designed for use
by state legislatures in revising and updating their
corporation statutes.
12 Siegel at 232. Siegel’s reference to “some mergers”
reects the fact that Delaware offers appraisal to an
acquired company’s shareholders in mergers other
than in stock-for-stock mergers.
13 Id. at 233.
14 Id.
There are 37 states
that restrict the
appraisal rights of
public-company
shareholders.
4 Business Valuation Update February 2015
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
has in fact changed its position twice. It deleted
the market exception in 1978 but then restored it
under specic circumstances in 1999. The 1999
Committee on Corporate Laws, cognizant that
most dissatisfied public shareholders have a
public market by which to dispose of their hold-
ings, agreed that unhappy public shareholders
should be compelled to use it. Acknowledging,
however, that market price
was not always a valid indica-
tion of value, the Committee
rationalized its use by point-
ing out appraisals’ defects of
high cost (arguably prohibi-
tive for small shareholders)
and inability to produce a
“perfect price.”
The 1999 Committee was
troubled, however, by the
problems that interested party transactions
could cause public shareholders. Siegel points
out that, after much deliberation, the Committee
concluded that an exemption to public share-
holders’ inability to obtain appraisal should be
granted in conict cases:
The 1999 Committee ... believed that the mar-
ket-out exception had great value even if it was
not reliable in all circumstances. Specically,
the strengths of the market-out are that it elimi-
nates the uncertainty, large costs, and time
commitment involved in any appraisal proceed-
ing. Furthermore, although the market may not
always achieve a perfect price, the variables
involved in an appraisal proceeding surely do
not produce an ideal price either, and are indis-
putably attendant by large nancial and time
costs.… [T]hrough its additional exception for
conict-of-interest transactions, the Committee
reinstated appraisal rights for those transac-
tions when the market is, arguably, unreliable.15
(emphasis added)
This exemption, referred to above by the MBCA
as an “additional exception,” serves the purpose
15 Id. at 247
of exempting public shareholders in conicted
transactions from the denial of appraisal rights.
Why many states and the MBCA choose to
deny appraisal rights to public sharehold-
ers through the market-out exception. The
states that have these market-exception restric-
tions do so for many of the same policy reasons
as those proposed by the
MBCA. They recognize the
considerable court and legal
expenses as well as the pro-
cedural difculties involved
in pursuing appraisal and
are unconvinced that judicial
appraisals inevitably result
in accurate or “fair” assess-
ments. Recognizing that the
courts assess fair value for
private-company share-
holders because no established market price
for private-company shares exist, they note that,
in contrast, public shareholders have an avail-
able market. These states prescribe that, when
a public market exists, public shareholders must
employ market price instead of court appraisal
as the measure of their interests.
Proponents of market-out exceptions argue that,
because shareholders of publicly traded compa-
nies may freely sell their shares, appraisal rights
are unnecessary.
[They] argue … that the market adequately
values stock; valuation through appraisal is
unnecessary because dissenting sharehold-
ers can sell their shares on the market for
the appropriate price…. [They] contend that
appraisal is redundant for shares of publicly
traded companies because the shareholders
… may obtain the appropriate value by selling
on the market.
For minority shareholders of a closely-held
company, finding a buyer willing to pay fair
value for the shares is usually difficult and
often impossible. Appraisal provides a means
for these shareholders to exit in an illiquid
market; however, appraisal is unnecessary for
The view that the
market-out exception
completely denies public
shareholders the right of
appraisal is inaccurate.
February 2015 bvresources.com 5
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
stockholders of a publicly-traded company
because they can easily sell on the market.16
In contrast, opponents of denying appraisal
rights to public shareholders argue that the mar-
ket-out exception is based on the questionable
concept that market price necessarily represents
the fair value of shares. The case against the
market-out was set forth in Barry Wertheimer’s
classic 1998 article on appraisal:
Legislatures that have enacted appraisal stat-
utes without market exceptions appear to have
recognized that the market does not always
adequately protect minority shareholders, and
that minority shareholders cashed out at a price
at or above the market price may require addi-
tional protection. [R]eliance on market price
does not adequately protect the interests of
minority shareholders.17
[A] powerful argument that counsels against
reliance on market price to determine fair value
stems from informational asymmetry. Insiders
proposing a cash-out merger are likely to have
access to information that is not available to
minority shareholders, and that is not reected
in market prices. It is unfair to allow insiders to
use such information to their benet, and unfair
to relegate dissenting shareholders to a market
price that does not reect information known
only to insiders.18
The market-out exception—four categories.
The policy arguments have divided the states
into four general categories.
1. First, 13 states have virtually all-inclu-
sive “market out” exceptions denying
appraisal rights to almost all sharehold-
ers of publicly traded companies. These
16 Jeff Goetz, “A Dissent Dampened by Timing: How
the Stock Market Exception Systematically Deprives
Public Shareholders of Fair Value,” 15 Fordham J. of
Fin. and Corp. L. 771, 777-79 (2009).
17 Barry M. Wertheimer, “The Shareholders’ Appraisal
Remedy and How Courts Determine Fair Value,” 47
Duke L. J. 613, 635 (1998).
18 Id. at 638.
states deny appraisal rights for public
shareholders, regardless of interested
party involvement or whether cash or
stock consideration is received. In these
states, the unhappy public shareholders’
only options are to sell in the market or
to accept the consideration being paid.
2. A second group of 11 states align them-
selves with the MBCA and draw their
public market exception more narrowly.
These states keep the market-out excep-
tion for publicly traded shares that are
exchanged for cash and/or stock, unless
the transaction is conicted—thus
providing for publicly traded companies’
shareholders to retain appraisal rights
when conicted parties are involved,
regardless of the consideration received.
In these cases, legislators have recog-
nized that the superior position of con-
trollers or interested parties may have
affected the market price.
3. A third group of 13 states, including
Delaware, base their determination to
deny appraisal to public sharehold-
ers on the type of consideration they
received in the transaction. They permit
appraisal for public shareholders who
receive cash, and, since cash is the
consideration received in a great major-
ity of mergers, the great majority of
public shareholders in these states are
afforded appraisal. They also provide
public shareholders with appraisal in
the very infrequent situations where they
receive alternative consideration such
as debt, preferred stock, or warrant.
However, they deny appraisal for public
shareholders in less frequent transac-
tions when the consideration consists
solely of publicly traded common stock.
They reason is that, when sharehold-
ers receive publicly traded common
stock in a stock-for-stock transaction,
the acquired company’s shareholders
continue as shareholders in a public
company. Because these disgruntled
shareholders continue to hold public
6 Business Valuation Update February 2015
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
stock, they can value their equity inter-
ests in the public market and use its
liquidity to exit when they choose.
4. Thirteen states have no market-out
exception at all for public-corporation
transactions, granting public sharehold-
ers appraisal rights and fair value equally
with private shareholders. They make
the appraisal remedy comprehensively
available to dissenting shareholders,
regardless of whether publicly or pri-
vately held, regardless of interested
party involvement, and regardless of the
form of consideration.
Exhibit 1 shows the jurisdictions according to
market exception category. It also includes a
listing of those states that allow appraisal to all
stockholders.
Exhibit 2 (see pgs. 26-28) is an Appendix to
Exhibit 1 and lists the jurisdictions that have
market-out exceptions alphabetically. It sum-
marizes for each state those situations in which
the market exception applies, as well as when an
exemption allows public shareholders appraisal
rights.
1. Public Shareholders Denied Appraisal
Thirteen states either flatly forbid appraisal
for all public shareholders or tightly restrict its
availability.
a. Nine of these states deny appraisal to all
shareholders of publicly traded compa-
nies regardless of the form of consider-
ation. The three most restrictive—Arizona,
Pennsylvania, and Rhode Island—dene
a publicly traded company to include all
companies with 2,000 shareholders even
if there is no market whatever for their
shares. This overbroad denition allows
such companies to squeeze out illiq-
uid minority holders and deny them the
appraisal rights that they would have had
if their shares were not deemed (incor-
rectly) to be publicly traded.
b. Four of these 13 states—Michigan,
Nevada, New Jersey, and
Exhibit 1. Jurisdictions According to Market Exception Category
All-Inclusive Market-Out
Exception Applied: Public
Shareholders Denied
Appraisal
Public Shareholders
Denied Appraisal Except
in Interested Party
Transactions
Public Shareholders
Denied Appraisal Only
When Public Shares Are
Sole Consideration
No Market-Out Exception
Applied: All Public
Shareholders Allowed
Appraisal
Alaska Connecticut California Alabama
Arizona Florida Colorado Arkansas
Indiana Idaho Delaware District of Columbia
Michigan Iowa Georgia Hawaii
Nevada Maine Kansas Illinois
New Jersey Massachusetts Louisiana Kentucky
Oregon Mississippi Maryland Missouri
Pennsylvania North Carolina Minnesota Montana
Rhode Island South Dakota New York Nebraska
South Carolina Virginia North Dakota New Hampshire
Tennessee West Virginia Oklahoma New Mexico
Wisconsin Tex as Ohio
Wyoming Utah Vermont
Washington
February 2015 bvresources.com 7
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
Wyoming—permit appraisals in the infre-
quent situation where a public shareholder
receives consideration that includes
anything other than cash and/or stock,
i.e., consideration such as debt, preferred
stock, warrants, or contingent rights, but
deny appraisal in all other cases.
2. Public Shareholders Denied Appraisal
Except in Conflict Transactions
Eleven states base their determination as to
whether to permit appraisal for shareholders
of public companies on whether the transac-
tion is conicted.19 They deny appraisals when
the consideration paid to public shareholders
is cash and/or publicly traded stock except
when the transaction is with an interested party.
The provision allowing appraisal in interested
party transactions serves to protect minority
shareholders, who are potentially subject to
an abusive transaction initiated by a control
shareholder:
Where a pre-existing, controlling shareholder
squeezes out the minority, … the minority
shareholders are especially vulnerable to an
acquisition at a price that fails to reect the
rm’s going concern value.20
Some statutes simply state that the market-
out exception “shall not be applicable and
appraisal rights shall be available … where the
corporate action is an interested transaction,”21
without defining what an “interested transac-
tion” is. Others, however, have complex deni-
tions of what constitutes a conict. Wertheimer
expressed concerns about trying to dene inter-
ested party transactions:
In order to apply the market exception only to
non-conict transactions, it would be neces-
sary to craft a statutory denition of conict
of interest transaction that is broad enough to
19 No states had specic exemptions for transactions
with interested parties prior to the 1999 MBCA
amendments. Siegel at 247.
20 Hamermesh and Wachter at 1021.
21 E.g., Va. Code Ann. §a. Code Ann.d Wac
cover the multitude of potential conicts. This is
a hazardous undertaking, because it creates a
risk that a conict of interest transaction could
slip through the cracks of the statutory deni-
tion.… A merger may appear to be an arm’s-
length transaction between unrelated parties,
but the directors or managers of one corpora-
tion may receive a payment on the side, or other
consideration, in return for their agreement to
support the transaction. This more subtle side
payment scenario is a real concern because it
negates true arm’s-length bargaining.22
He concluded that “it is preferable to provide
an appraisal remedy to public shareholders
in all contexts, rather than only in non-conict
situations.”23
3. Public Shareholders Denied Appraisal
in Stock-for-Stock Transactions
for Publicly Traded Shares
Delaware and 12 other states grant appraisal
rights to public-corporation shareholders who
receive anything other than publicly traded stock
as consideration in the transaction, i.e., cash or
alternate consideration such as debt, preferred
stock, or warrants. They apply the market-out
exception only if shareholders of publicly traded
companies receive publicly traded shares in
a stock-for-stock transaction.24 Some writers
justify barring appraisal for shareholders of pub-
licly traded companies in stock-for-stock trans-
actions while permitting it for cash transactions
because, in a stock-for-stock transaction, the
shareholders remain as investors in the com-
bined public company:
[It] simply recognizes that the shareholder-
rm relationship has not been terminated, so
appraisal has not been triggered. A pure equity
exchange results in a continuing equity relation-
ship, and the shareholder continues to bear the
firm’s operational risk at a price discounted
22 Wertheimer at 706.
23 Id. at 707.
24 Generally, if shareholders receive cash for fractional
shares in a stock-for-stock merger, the market-out
nonetheless applies.
8 Business Valuation Update February 2015
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
for expected future agency costs. Further, at
the time of merger, the expected agency costs
faced by the acquired and acquiring stocks are
the same. This explains the cash out exception:
if the minority is cashed out, then this relation-
ship is terminated.25
Shareholders who receive common stock
remain as shareholders in a larger company that
includes the company in which they had invested,
while those who receive cash cease participat-
ing in the company’s upside. Even worse off are
shareholders who receive alternative consider-
ation such as low-quality debt or preferred stock,
since they cease participating in the upside but
retain downside risk.
Since controllers squeezing out minority share-
holders almost always use cash rather than
stock, granting appraisal except in those limited
situations where the sole consideration is mar-
ketable common stock substantially reduces the
opportunity for abuse of minority shareholders.
However, all of these states (other than Maryland)
deny appraisal in many or all interested party
transactions. In seven of these states,26 all share-
holders of publicly traded companies who are
squeezed out in any stock-for-stock merger
with another public company are denied an
appraisal remedy even if it is an interested party
transaction. Delaware, Kansas, New York, and
Oklahoma permit appraisal when sharehold-
ers are squeezed out for stock in a short-form
merger—this limited provision serves to protect
minority shareholders who are given parent
company stock, but only when the parent owns
at least 90% before the squeeze-out. Texas
permits appraisal in any merger with a parent
company but not in a stock-for-stock merger
with another company controlled by an inter-
ested party. Maryland is an anomaly and is the
most shareholder-friendly of all states with a
market-out exception—it permits appraisal in all
25 Brett A. Margolin and Samuel J. Kursh, “The
Economics of Delaware Fair Value,” 30 Del. J. Corp.
L. 413, 432 (2005).
26 California, Colorado, Georgia, Louisiana, Minnesota,
North Dakota, and Utah.
nonstock transactions and in all stock-for-stock
transactions with interested parties.
Denying appraisal in interested party stock-for-
stock transactions leaves room for abuse by
a controller who uses stock and lowballs the
exchange ratio, but, in practice, only a small
portion of squeeze-out transactions utilize stock.
Some commentators appear not to have recog-
nized the fact that most stock-for-stock mergers
are at arm’s length and thus are less likely to
result in viable appraisal actions.27
4. States With No Market-Out Exception
Thirteen states and the District of Columbia have
no market-out exception. Their appraisal stat-
utes make no distinction between public and
private corporations in granting appraisal rights
to shareholders. These states concur with the
views expressed by Wertheimer in 1998, when
he wrote, “There is no longer any justication for
this exclusion, given the minority shareholder
protection rationale for the remedy.”28
The statutory definition of a publicly traded
company varies widely. States use widely
varying criteria in determining whether a corpora-
tion is to be deemed public (and thus subject to
the market-out exception) or private. Some use
a clear and simple denition: Shares are deemed
publicly traded if they are listed on a national
securities exchange.29 Some states deem any
shares traded on any “organized market” to be
publicly traded, and some do not even require
that a market exists.
Where the 2,000-shareholder requirement is
an alternative to listing, (a) some states exclude
insider shares; (b) some states require 2,000
27 For example, Siegel asserts, “Delaware’s market-out
exception … clearly decrease[s] the frequency of
appraisal rights.” Siegel at 251.
28 Wertheimer at 704.
29 This category has various alternatives: (i) the New
York Stock Exchange and the American Stock
Exchange (now called the NYSE MKT LLC); (ii) these
two markets plus Nasdaq; or (iii) more broadly, a
national securities exchange registered with the SEC.
February 2015 bvresources.com 9
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
shareholders of record;30 and (c) some states
require a minimum aggregate market value of
common stock, usually $20 million. The MBCA
recommends that the following language, which
is substantially the same as that adopted by
several states, be adopted to define public
shareholders:
(1) Appraisal rights shall not be available for
the holders of shares of any class or series of
shares which is:
(i) listed on the New York Stock Exchange or
the American Stock Exchange or [Nasdaq];
or
(ii) not so listed or designated, but has at
least 2,000 shareholders, and the outstand-
ing shares of such class or series has a
market value of at least $20 million (exclu-
sive of the value of such shares held by its
subsidiaries, senior executives, directors
and benecial shareholders owning more
than 10 percent of such shares).31
An added twist is that many states deem com-
panies with 2,000 shareholders or more to be
publicly traded even if there is no organized
market. The assumption that shares of com-
panies having more than 2,000 shareholders
are liquid when there is no organized market is
unrealistic, since shareholders have no liquidity
without an organized market. In practice, numer-
ous companies with 2,000 shareholders are not
actively traded and sometimes are clearly illiquid:
Some large private companies have shareholder
agreements that limit or even prohibit selling
to third parties. Moreover, many companies
that trade in the “pink sheets” have numerous
shareholders but minimal trading volume. “Pink
sheet” companies often have inadequate public
disclosure (or none at all), so their trading prices
30 Counting shareholders of record rather than bene-
cial owners raises the bar for companies traded on a
national securities exchange, since it is common for
such shares to be held by a nominee in “street name.”
However, it has negligible impact on companies with
many shareholders but no liquid market.
31 MBCA, §13.02(b).
are highly unlikely to reflect the company’s
value. The underlying concept of the market-out
exception is that shareholders have the option
of selling in an active and informed market.
Shareholders do not have this option unless there
is a liquid and informed market into which they
can sell.
Conclusions. Since the market price does
not fully protect minority shareholders, the 11
states with the rigid requirement that all acquisi-
tions of publicly traded shares, even including
squeeze-outs and other conicted transactions,
be subject to the market-out exception unrea-
sonably deprives abused public-company share-
holders the ability to obtain redress through the
appraisal remedy.
The states that have exemptions to their market
exceptions and grant appraisal rights to dis-
senting shareholders compelled to accept
inadequate prices in conicted situations do so
appropriately. Granting appraisal rights for dis-
senters in interested party transactions is ben-
ecial to minority shareholders, provided that
the denition of interested party transactions is
carefully considered and comprehensive.
A market-out exception limited to stock-for-stock
mergers can be justied by the fact that share-
holders in the acquired company continue to be
shareholders in the surviving entity but are vul-
nerable to abuse when there is not an interested
party exemption. u
Gilbert E. Matthews, CFA, is senior managing
director and chairman of the board of Sutter
Securities Inc. (San Francisco) and can be
reached at gil@suttersf.com. He has more than
50 years of experience in investment banking
and has spoken and written extensively on fair-
ness opinions, corporate valuations, and litiga-
tion relating to valuations.
Michelle Patterson, J.D., Ph.D., is a consul-
tant to Sutter Securities. She was an associate
in litigation with Gibson, Dunn & Crutcher and
has taught at Brandeis, UC Santa Barbara, Mills
College, and San Francisco State University.
10 Business Valuation Update February 2015
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
Exhibit 2 (Appendix to Exhibit 1). Terms of the Market Exception*, Continued
Market exception
applies to:
Exemption from the
market exception:
Alaska Shares of company listed on a national securi-
ties exchange.
–
Ariz. Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders of
record.
–
Calif. Shares of company listed on a national securi-
ties exchange.
If shares have transfer restrictions or if shareholder
receives anything but marketable shares, as dened.
Cash for fractional shares does not trigger appraisal
rights.
Colo. Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders of
record.
If shareholder receives anything but marketable
shares, as dened. Cash for fractional shares does
not trigger appraisal rights.
Conn. Shares of company traded in an organized
market with 2,000 shareholders and market
value of $20 million, excluding shares held by
senior executives, directors, and 10% benecial
shareholders.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
Del. Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders.
Short-form merger, or if shareholder receives anything
but marketable shares, as dened. Cash for fractional
shares does not trigger appraisal rights.
Fla. Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders and
market value of $10 million excluding shares
held by senior executives, directors, and 10%
benecial shareholders.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
Ga. Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders of
record.
If shareholder receives anything but marketable
shares, as dened, or if shareholder receives shares
different in type or exchange ratio from shares offered
to others of same class. Cash for fractional shares
does not trigger appraisal rights.
Idaho Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders and
market value of $20 million excluding shares
held by senior executives, directors, and 10%
benecial shareholders.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
Ind. Shares of company listed on a national securi-
ties exchange.
–
Iowa Shares of listed or Nasdaq company or
company with 2,000 shareholders and market
value of $20 million excluding shares held by
senior executives, directors, and 10% benecial
shareholders.
If acquisition is by benecial owner of 20% or by party
with right to elect 25% of directors, or if shareholder
receives anything but cash or marketable shares, as
dened.
Kan. Shares of listed or Nasdaq company or
company with 2,000 shareholders of record.
Short-form merger, or if shareholder receives anything
but marketable shares, as dened. Cash for fractional
shares does not trigger appraisal rights.
February 2015 bvresources.com 11
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
Exhibit 2 (Appendix to Exhibit 1). Terms of the Market Exception*, Continued
Market exception
applies to:
Exemption from the
market exception:
La. Shares of company listed on a national securi-
ties exchange.
If not converted solely into shares of surviving corpo-
ration (but no public market requirement).
Me. Shares of company traded in an organized
market with 2,000 shareholders and market
value of $20 million, excluding shares held by
senior executives, directors, and 10% benecial
shareholders.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
Md. Shares of company listed on a national securi-
ties exchange.
Merger with interested party, or if not converted solely
into shares of surviving corporation (but no public
market requirement), or if directors and executive of-
cers were the benecial owners, in the aggregate, of
5%, or if directors and executive ofcers receive stock
on terms not available to all holders. Cash for frac-
tional shares does not trigger appraisal rights.
Mass. Marketable shares If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares.
Mich. Shares of company listed on a national securi-
ties exchange.
If shareholder receives anything but cash or market-
able shares, as dened.
Minn. Shares of listed or Nasdaq company. If shareholder receives anything but marketable
shares, as dened. Cash for fractional shares does
not trigger appraisal rights.
Miss. Shares of listed or Nasdaq company or
company with 2,000 shareholders of record and
market value of $20 million excluding shares
held by senior executives, directors, and 10%
benecial shareholders.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
Nev. Shares of listed or Nasdaq company or
company with 2,000 shareholders.
If shareholder receives anything but marketable
shares, as dened. Cash for fractional shares does
not trigger appraisal rights.
N.J. Shares of company listed on a national securi-
ties exchange or with 1,000 shareholders of
record.
If shareholder receives shares, obligations, or other
securities that will be listed on a national securities
exchange or held by not less than 1,000 holders of
record.
N.Y. Shares of company listed on a national securi-
ties exchange.
Short-form merger, or if shares are not entitled to vote
on transaction, or if shareholder receives anything
but marketable shares, as dened. Cash for fractional
shares does not trigger appraisal rights.
N.C. Shares of company traded in an organized
market with 2,000 shareholders and market
value of $20 million, excluding shares held by
senior executives, directors, and 10% benecial
shareholders.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
N.D. Shares of company listed on a national securi-
ties exchange.
If shareholder receives anything but marketable
shares, as dened. Cash for fractional shares does
not trigger appraisal rights.
12 Business Valuation Update February 2015
PUBLIC SHAREHOLDERS, FAIR VALUE, AND THE ‘MARKET-OUT EXCEPTION’
Reprinted with permissions from Business Valuation Resources, LLC
Exhibit 2 (Appendix to Exhibit 1). Terms of the Market Exception*, Continued
Market exception
applies to:
Exemption from the
market exception:
Okla. Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders of
record.
Short-form merger, or if shareholder receives anything
but marketable shares, as dened. Cash for fractional
shares does not trigger appraisal rights.
Ore. Shares of company listed on a national securi-
ties exchange.
–
Pa. Shares of listed or Nasdaq company or
company with 2,000 shareholders.
–
R.I. Shares of listed or Nasdaq company or
company with 2,000 shareholders of record.
–
S.C. Shares of company listed on a national securi-
ties exchange.
–
S.D. Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders and
market value of $20 million excluding shares
held by senior executives, directors, and 10%
benecial shareholders.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
Tenn. Shares of company listed on a national securi-
ties exchange.
–
Tex as Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders of
record.
Merger with parent, or if shareholder receives any-
thing but marketable shares, as dened. Cash for
fractional shares does not trigger appraisal rights.
Utah Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders of
record.
If shareholder receives anything but marketable
shares, as dened. Cash for fractional shares does
not trigger appraisal rights.
Va. Shares of company traded in an organized
market with 2,000 shareholders and market
value of $20 million.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
W.Va . Shares of company listed on a national securi-
ties exchange or with 2,000 shareholders and
market value of $20 million excluding shares
held by senior executives, directors, and 10%
benecial shareholders.
If transaction is with interested party, or if shareholder
receives anything but cash or marketable shares, as
dened.
Wisc. Shares of company listed on a national securi-
ties exchange.
–
Wyo. Shares of company traded in an organized
market with 2,000 shareholders and market
value of $20 million, excluding shares held by
senior executives, directors, and 10% benecial
shareholders.
If shareholder receives anything but cash or market-
able shares, as dened.
* In this exhibit, a “listed” company is a company traded on the New York Stock Exchange or the NYSE MKT LLC. The
term “national securities exchange” includes these two exchanges, Nasdaq, and several smaller exchanges. “Marketable
shares, as dened” refers to the denition in the center column.