What Are Appraisal Rights in a Delaware Cash Merger?
Holders who think a cash buyout is too cheap can ask a court to decide the price. Here is how Section 262 works, the demand and 120-day deadlines, and the 1% or $1 million rule.
Appraisal rights let a shareholder who does not vote for a merger ask a court to set the “fair value” of their shares and pay that instead of the merger price. For Delaware companies the rules are in Section 262 of the General Corporation Law, and they usually apply when holders are paid cash. The proxy statement explains the procedure.
Appraisal is a court case, not a form you tick. It takes time, costs money and can end with a value below the deal price. Most holders who use it are funds, but the rules apply to any eligible holder.
Who qualifies for appraisal rights?
Under 8 Del. C. § 262, a stockholder qualifies if they:
- hold the shares on the date they make the demand;
- keep holding them continuously through the effective date of the merger;
- do not vote in favor of the merger or consent to it in writing; and
- make a proper written demand for appraisal on time.
Beneficial owners whose shares are held at a broker can make the demand in their own name. The demand must identify the record holder, include documentary evidence of ownership and give an address for notices.
When are appraisal rights available for listed stock?
For shares listed on a national exchange, or held by more than 2,000 record holders, appraisal is generally not available. That is the “market-out” exception: the law assumes those holders can sell in the market instead.
The exception has an exception. Appraisal rights come back when holders are required to accept anything other than shares of a listed company (or one with more than 2,000 holders), cash in lieu of fractional shares, or a combination of those. In practice:
| Deal type (Delaware target, listed shares) | Appraisal available? |
|---|---|
| All cash | Yes |
| Cash and stock mix | Generally yes, because holders must accept cash beyond fractional shares |
| All stock of a listed buyer | Generally no |
| Tender offer followed by a Section 251(h) merger | Yes, for shares not tendered |
| Private company shares | Yes, in a merger covered by Section 262 |
Companies incorporated in other states follow their own statutes, which differ on eligibility and procedure. The proxy statement says which law applies.
How and when do you demand appraisal?
The demand is a written notice to the company that you want your shares appraised, and the deadline depends on how the deal is approved.
- Merger with a shareholder vote: the company must send notice of appraisal rights at least 20 days before the meeting, and your written demand must be delivered before the vote is taken.
- Tender offer and Section 251(h) merger: the demand is due within the later of the completion of the offer or 20 days after the notice of appraisal rights is sent.
- Approval by written consent: the demand is due within 20 days after the notice is sent.
Voting for the merger or tendering your shares gives up appraisal for those shares. A holder who wants to keep the option must vote against or abstain, and must not tender. Our guides to how a merger vote works and how tender offers work cover those steps.
What happens after the merger closes?
The case moves to the Delaware Court of Chancery. The key dates are set by statute:
| Step | Deadline under § 262 |
|---|---|
| Withdraw the demand and take the merger price | Any time within 60 days after the effective date; later only with the company’s written approval |
| File the petition in the Court of Chancery | Within 120 days after the effective date, by the company or any holder who demanded; if no one files, appraisal rights end for all shares |
| Court decision on fair value | No fixed deadline; trials often take a year or more |
The court decides the fair value of the shares, excluding any value arising from the merger itself, and orders interest. Unless the court decides otherwise for good cause, interest accrues at 5 percentage points over the Federal Reserve discount rate, compounded quarterly. The company may prepay an amount in cash before judgment, and interest then runs only on the difference between that payment and the final award, plus interest already accrued.
What is the 1% or $1 million rule?
For shares that were listed on a national exchange, the court dismisses an appraisal case unless the total shares seeking appraisal exceed 1% of the outstanding shares of the class, or the merger consideration for those shares exceeds $1 million. This de minimis rule, in § 262(g), does not apply to short-form mergers under Section 253 or 267.
For a small holder, this means appraisal only proceeds if other holders, often large funds, also demand it. Small holders cannot rely on their own claim alone in a listed-company deal.
What are the risks and costs of appraisal?
Appraisal trades a certain price for an uncertain one. The main risks:
- The court can set fair value below the deal price. Delaware courts in recent years have often given heavy weight to the deal price itself when the sale process was competitive.
- You receive no merger payment while the case runs, unless the company chooses to prepay.
- Legal and expert fees can be large. The court can spread some costs among the petitioners.
- The shares stop trading after the merger, so you cannot sell while the case continues.
For tax treatment of the cash you eventually receive, see our guide to how cash and stock mergers are taxed. Whether appraisal makes sense for a particular holder is a question for a securities attorney.
Bottom line
The first thing to check is the appraisal section of the proxy statement or Schedule 14D-9, which states whether rights are available, the exact demand deadline and where to send the demand. If you hold through a broker, confirm early how the broker handles appraisal demands, because a vote cast for the deal or a tender instruction on your account ends the right for those shares.
FAQ
Do I lose appraisal rights if I don’t vote?
No. Not voting, or voting against, keeps appraisal rights as long as you make a proper written demand on time and keep holding the shares until the merger is effective.
Are appraisal rights available in a stock-for-stock merger?
Usually not for listed Delaware companies, because of the market-out exception. They return if holders must take cash or unlisted securities beyond cash for fractional shares.
Can I change my mind after demanding appraisal?
Yes, within 60 days after the merger’s effective date you can withdraw and take the merger price. After that, withdrawal needs the company’s written approval.
How long does an appraisal case take?
The petition must be filed within 120 days of the effective date, and contested cases often take a year or more to reach a decision. Interest on the award runs during that time.
