THE ROLE OF APPRAISAL IN CORPORATE LAW

Peter V. Letsou*
Appraisal statutes give objecting shareholders the option to sell
their shares back to the corporation for “fair value” following certain
fundamental corporate changes. Although the specifics of appraisal differ
from jurisdiction to jurisdiction, most state appraisal statutes share several
basic features: they confer appraisal rights on shareholders who object to
one or more of the following transactions: mergers and consolidations,
sales of all, or substantially all, the corporation’s assets (other than in
connection with dissolutions), and “serious” charter amendments, such as
those altering the purposes for which the corporation is organized;1 they
define “fair value” -- that is, the amount to be received by shareholders
upon exercise of their appraisal rights -- as the value of the shares prior to
giving effect to the transaction from which the shareholders dissent;2 and
they include a “market out” which withdraws appraisal rights when the
objector’s shares are publicly traded.3

*
Professor of Law & Director, Center for Corporate Law, University of
Cincinnati College of Law. B.A., Harvard University, 1983; J.D., University of Chicago,
1986. I would like to thank Barry E. Adler, Lloyd R. Cohen, Geoffrey P. Miller, David
A. Skeel, Robert B. Thompson, and participants at the 1997 Annual Meeting of Canadian
Law and Economics Association for their helpful comments on earlier drafts of this
Article.
1
See, e.g., Del. G.C.L. § 262(b); Revised Model Business Corporation Act
§13.02 (1985) [hereinafter RMBCA]; 2 American L. Inst., Principles of Corporate
Governance: Analysis and Recommendations §7.21 (1994) [hereinafter Principles of
Corporate Governance]. The comments to §7.21 of the Principles of Corporate
Governance report that statutes in all American jurisdictions authorize a right of appraisal
for dissenters to certain mergers and consolidations; statutes in at least 46 jurisdictions
provide for appraisal on a sale of substantially all corporate assets; and at least 25
jurisdictions grant appraisal in the event of specified amendments to the corporate
charter. 2 Principles of Corporate Governance §7.21, comment a.
2
See, e.g., Del. G.C.L. §262(h); RMBCA §13.01(3). The comment to RMBCA
§13.01 indicates that the majority of states appraisal statutes adhere to the goal of
preserving shareholders’ prior right as shareholders. But cf. 2 Principles of Corporate
Governance §7.22(c) (stating that, in certain corporate combinations, a “court may
include a proportionate share of any gain reasonably to be expected to result from the
combination, unless special circumstances would make such an allocation
unreasonable”).
3
See, e.g., Del. G.C.L. §262(b)(1). Professor Thompson reports that, as of
1995, “[a]bout half the states (covering the great majority of public corporations) . . .
[withdrew] appraisal if the corporation’s stock [was] traded on a stock exchange or [was]
held by 2000 shareholders.” Robert B. Thompson, Exit, Liquidity, and Majority Rule:

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 Traditionally, commentators viewed appraisal rights as necessary
to protect shareholders who object to fundamental changes from being
forced to invest in “new” firms against their will.4 But Bayless Manning
challenged this traditional view of appraisal in his famous 1962 essay on
the remedy.5 He argued that the traditional view of appraisal, as a remedy
necessary to protect shareholders from the effects of fundamental change,
had to be flawed because appraisal statutes were not broad enough to
achieve that goal.6 In this regard, Manning observed that, while appraisal
statutes applied to some fundamental changes brought on by shareholders
and directors (e.g., mergers and charter amendments), they did not apply
to all shareholder or director-approved changes that might be
characterized as fundamental;7 in addition, he noted that appraisal rights
did not apply to any fundamental changes brought on by creditors,
customers, suppliers, or others outside the firm.8 From these observations,
Manning concluded that drafters of appraisal statutes were not concerned
with “an economic problem or with economic solutions,”9 but were
merely concerned with “solv[ing] a purely conceptual need [under the
nineteenth century view of corporations as things that lived and died] -- to
provide something for the shareholder who was about to undergo a legal

Appraisal’s Role in Corporate Law, 84 Geo. L.J. 1, 29 & n. 114 (1995) (citing 2 Model
Business Corp. Act. Ann. §11.01 (3d ed. 1985)); see also Joel Seligman, Reappraising
the Appraisal Remedy, 52 Geo. Wash. L. Rev. 829, 835 (1984) (reporting that 73% of
U.S. corporations were incorporated in one of the 25 states including a stock market
exception to the appraisal process). The drafters of the Revised Model Business
Corporation Act, however, rejected a “market out,” see RMBCA §13.02, as did the
drafters of the ALI’s Principles of Corporate, see Principles of Corporate Governance,
supra note 1, at §7.21 & Comment d.
4
See, e.g., Norman D. Lattin, The Law of Corporations 591 (2d ed. 1971); see
also Thompson, supra note 3, at 18-19 & nn. 77 & 78 (citing cases espousing the
traditional view).
5
See Bayless Manning, The Shareholder’s Appraisal Remedy: An Essay for
Frank Coker, 72 Yale L.J. 223 (1962).
6
Id. at 241-43.
7
Id. For example, Manning noted that appraisal rights applied to transactions in
which a corporation sells all or substantially all its shares to another, but not to
transactions where a corporation buys all or substantially the assets of another.
8
Id. For instance, Manning noted that appraisal rights were not triggered by
crippling labor strikes or national calamities, even though such events could have
dramatic consequences for a firm or its shareholders.
9
Id. at 242.

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trauma -- a trauma deemed compensable regardless of its economic
consequences upon him.”10 Manning therefore left his readers with a
challenge: articulate a meaningful economic function for appraisal or
reject the remedy as a vestige of an outdated view of the corporation.11
Several commentators have taken up Manning’s challenge of
explaining appraisal rights, most notably Professor Fischel,12 Professors
Kanda and Levmore,13 and Professor Gilson.14 For the most part, these
commentators have argued that the appraisal remedy should be viewed as
a check on misconduct by managers and controlling shareholders. But the
efforts of these commentators have fallen short for three principal reasons.
First, each of the theories proposed by these commentators conflicts with
one or more of the basic features of the appraisal remedy (such as the
triggering provisions or the valuation rules); second, none explains the

10
Id. at 246-47 (emphasis in original). Manning’s explanation for the adoption
of appraisal statutes is discussed infra at notes 167-172 and accompanying text.
11
Manning acknowledged that eliminating appraisal probably was not politically
feasible. Manning, supra note 5, at 262. He therefore recommended limiting appraisal to
the extent possible through adoption of the market out. Id. at 260-62. Manning’s call for
a market out was widely accepted, see supra note 3, though not everyone agreed with his
criticism of appraisal, see, e.g., Melvin A. Eisenberg, The Structure of the Corporation,
Ch. 7 (1976). Ernest Folk, the Reporter for the Delaware Corporation Law Revision
Committee which prepared the major 1967 revision of the Delaware Corporation law,
echoed Meaning’s criticism of appraisal in his Report on Delaware Corporation Law
(1968). Folk wrote that “[m]uddled theory and inconsistent treatment has always been
characteristic of the appraisal right in all jurisdictions: a few transactions have been
singled out to trigger cash payment rights, although other events in corporate life, often
more drastic in the impact, create no such right.” Id. at 196. The Report therefore
recommended that “the traditional appraisal right should be substantially abolished in
Delaware” by, “as a minimum, dropping cash-for-dissenters with respect to shares listed
on any exchange or subject to the expanded jurisdiction of the S.E.C. under the Securities
Act Amendments of 1964.” Id. See also Folk, De Facto Mergers in Delaware: Hariton
v. Arco Electronics, Inc., 49 Va. L. Rev. 1261 (1963) (setting forth in full Folk’s
argument for substantially abolishing appraisal rights).
12
See Daniel R. Fischel, The Appraisal Remedy in Corporate Law, 1983 Am. B.
Found. Res. J. 875.
13
See Hideki Kanda & Saul Levmore, The Appraisal Remedy and the Goals of
Corporate Law, 32 U.C.L.A. L. Rev. 429 (1985).
14
See Ronald J. Gilson & Bernard S. Black, The Law and Finance of Corporate
Acquisitions 714-22 (2d ed. 1995). The explanation of the appraisal remedy in the
Gilson and Black casebook is attributed to Professor Gilson only because it originally
appeared in the casebook’s first edition, which was written by Gilson alone. See Ronald
J. Gilson, The Law and Finance of Corporate Acquisitions 573-80 (1986).

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evolution of the appraisal remedy over time, particularly the introduction
and expansion of the market out;15 and third, none of these theories carve
out for appraisal a function that is distinct from that served by other corporate
law remedies, such as the shareholders’ action for breach of fiduciary duty.

This paper offers a new theory of appraisal which overcomes these

problems. This theory focuses on the effects, on shareholders who lack
effective access to capital markets, of transactions that alter the risk of the
firm’s shares.16 As the discussion below explains, when shareholders lack
effective access to capital markets, risk-altering transactions (particularly
those which alter the firm’s market risk17) can make some shareholders
better off, while leaving others worse off.18 Appraisal rights require the
corporation to compensate shareholders who may be harmed by such
transactions and place the net costs of providing that compensation on
shareholders who otherwise gain.19 As a result, shareholders who gain
from appraisal triggering transactions will only vote in favor of those
transactions if their gains more than offset the net costs of compensating
objectors; appraisal rights therefore decrease the probability of risk-

15
See supra note 3 and accompanying text.
16
“Risk” refers to the extent to which a security’s returns can be expected to
vary over time. Risk comes in two forms: (1) market, systematic, or undiversifiable risk,
which refers to the sensitivity of the security’s returns to movements in the market as a
whole; and (2) unique, unsystematic, or diversifiable risk, which refers to the sensitivity
of the security’s returns to firm-specific events (i.e., perils which are peculiar to the
particular company). See Richard A. Brealey and Stewart C. Myers, Principles of
Corporate Finance 156 & nn. 14 & 15 (5th ed. 1996).
17
For a definition of market risk, see supra note 16.
18
Transactions that alter a firm’s unique risk will not ordinarily have any impact
on investors because investors can eliminate the unique risk associated with a particular
security by holding a diversified portfolio of investments. See Brealey & Myers, supra
note 16, at 160. So most investors care only about transactions which alter the firm’s
market risk (i.e., the firm’s sensitivity to movements in the market as a whole). But some
investors are precluded from fully diversifying their investment portfolios because they
are required by practical or legal considerations to invest a substantial portion of their
wealth in a small number of companies. These investors will be affected by changes in
unique risk, as well as by changes in market risk.
19
As is explained infra, the cost of compensating objectors is equal to the excess
of: (a) the value of the claims the corporation must issue to obtain the cash necessary to
compensate objectors; over (b) the value of the shares that the objectors sell to the
corporation.

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altering transactions that result in net losses to shareholders, causing all
shares to trade at higher prices ex ante.20
The analysis that follows is divided into three parts. Part I
examines and criticizes the principal post-Manning efforts to explain
appraisal. Part II explores in greater detail the new theory of appraisal
advanced in the preceding paragraph, including the ability of that theory to
explain the structure and evolution of appraisal statutes. Part III explores
the main implications of the theory for the future development of appraisal
statutes.
I. Previous Efforts to Explain Appraisal
This Part examines three previous attempts to solve the appraisal
puzzle posed by Manning. It focuses on (1) Fischel’s 1983 paper, The
Appraisal Remedy in Corporate Law;21 (2) Kanda and Levmore’s 1985
paper, The Appraisal Remedy and the Goals of Corporate Law;22 and (3)
Gilson’s discussion of the de facto merger doctrine in The Law and
Finance of Corporate Acquisitions.23 The analysis presented in this Part
concludes that none of these works adequately explains the appraisal
remedy.
A. Fischel
Fischel offers the most popular post-Manning explanation of
appraisal rights. Fischel views appraisal as an implied term of the
corporate contract “that sets the minimum price at which the firm, or a part
of it, can be sold in situations where certain groups are more likely to
attempt to appropriate wealth from other groups than to maximize the
value of the firm.”24 Fischel gives two examples of instances where

20
The capacity of appraisal rights to protect shareholders from the effects of
risk-altering transactions was noted by Professor MacIntosh in his excellent article on
Canadian appraisal rights. See Jeffrey G. MacIntosh, The Shareholders’ Appraisal Rights
in Canada: A Critical Reappraisal, 24 Osgoode Hall L.J. 201, 209-10 (1986). But
Professor MacIntosh fails to note the link between appraisal rights, on the one hand, and
voting behavior by shareholders, on the other. It is through this link that appraisal rights
serve their primary purpose of reducing the ex ante risk of transactions that result in net
losses to shareholders.
21
Supra note 12.
22
Supra note 13.
23
Supra note 14.
24
Fischel, supra note 12, at 876.

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wealth appropriation is more likely than wealth maximization: (1) “when
shareholders of one firm attempt to exploit the coordination problems of
shareholders of another firm” by making a coercive, two-tiered tender
offer at blended price which may be lower than the current market value
of the latter firm’ shares;25 and (2) when a majority shareholder attempts
to “confiscate the pro rata share of the minority in a freeze-out merger”--
that is, where a majority shareholder uses its control to approve a merger
which provides minority shareholders with less than the fair value of their
shares.26 Fischel suggests that, by setting a minimum price which must
be paid to objecting shareholders in the second step of a two-tiered tender
offer or in a freeze-out merger, appraisal rights minimize the likelihood
that two-tiered tender offers and freeze-out mergers will be used to
appropriate shareholder wealth. He therefore concludes that the appraisal
remedy benefits all shareholders by causing shares to trade at higher prices
ex ante.27
Fischel’s theory overcomes, at least in part, Manning’s principal
concern regarding the traditional theory of appraisal rights: it provides an
explanation for why some types of “fundamental” corporate changes
trigger appraisal rights while others do not. In short, Fischel argues that
appraisal rights should only be triggered in cases where their application
will reduce the likelihood of value decreasing transactions. This is true
when appraisal rights are applied to transactions such as coercive, two-
tiered tender offers and freeze-out mergers, since, without appraisal rights,
shareholders might be forced to sell their shares to a bidder or controlling
shareholder at too low a price. But it is not when appraisal rights are
applied to actions of outsiders, such as a presidential heart attack or labor
strife, or to actions by managers in circumstances where managers already
have strong incentives to maximize firm value. This is because conferring
appraisal rights on shareholders in these instances will neither reduce the
likelihood that actions by outsiders will harm the corporation nor improve
the quality of decision-making by already-well-motivated managers.

25
Id. For instance, a bidder might offer $40 per share for 51% of the firm’s
stock in a partial tender offer and announce an intention to acquire the remaining shares
for $30 in second step merger which will follow its acquisition of control; shareholders
might accept the offer, which has a blended value of slightly more than $35 per share,
even if they think their shares are worth $37.50, because they fear being forced to accept
$30 per share in a second step merger if they fail to tender.
26
Id. at 876-77.
27
Id. at 878-81.

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 But while Fischel’s theory of appraisal rights at least roughly
explains the pattern of appraisal statutes, the theory is far from perfect.
First, Fischel’s theory fails to fully explain the basic triggering provisions
of appraisal statutes.28 As Fischel himself concedes,29 his theory cannot
explain why virtually all corporate statutes provide for appraisal rights in
connection with arms-length mergers,30 a class of transactions where
managers do not face conflicts of interest that prevent them from striking
the best possible deal for shareholders.31 Nor can Fischel’s theory explain
the common application of appraisal rights to charter amendments altering
the corporation’s purposes32 or the frequent denial of appraisal rights for
transactions such as dissolutions and reverse stock splits, even when those
transactions are used by majority shareholders to effect minority freeze-
outs.33
Second, Fischel’s theory cannot explain the popularity of the
“market out” which, as previously noted, generally withdraws appraisal
rights when the objector’s shares are publicly traded.34 Fischel
acknowledges this problem in Part II of his article: “A far more persuasive
criticism of the [market out] is that it is inconsistent with the purpose of
appraisal . . . . [For example,] [w]ithdrawing the appraisal rights of the
shareholders of the [minority] bloc if their shares are publicly traded . . .
will not solve the problem of the majority being able to appropriate wealth

28
Other commentators have also noted this problem. See, e.g., Kanda &
Levmore, supra note 13, at 435.
29
Fischel, supra note 12, at 884 n.36.
30
An arm’s-length merger is one where two unrelated firm’s merge.
31
This problem is also noted by Kanda & Levmore, supra note 13, at 435. For a
discussion of Gilson’s solution to this problem with Fischel’s theory, see infra note 89
and accompanying text.
32
The application of appraisal statutes to charter amendments is not unusual.
See supra note 1. Under Fischel’s theory, appraisal rights should only be triggered by
charter amendments if the application of appraisal rights could be expected to reduce the
incidence of sub-optimal amendments. But this result is unlikely since managers will
ordinarily have strong incentives to endorse only those charter amendments that
maximize firm value. For a general discussion of the constraints which operate on firm
managers, see Larry E. Ribstein & Peter V. Letsou, Business Associations 295-98 (3d ed.
1996).
33
See Thompson, supra note 3, at 34.
34
See supra note 3 and accompanying text.

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from the minority ex post . . . .”35 But Fischel contends that the tension
between his theory and the “market out” is lessened, at least in Delaware,
because the Delaware statute restores appraisal rights where shareholders
must exchange publicly traded shares for cash or debt.36 This, he says,
represents “a recognition . . . that appraisal should be available when the
danger of appropriation is the greatest”37 -- i.e., in cases where the
minority is completely frozen out of the firm, rather than provided with a
continuing equity interest. But Fischel’s reliance on a “cash-out”
exception to reconcile his theory with the “market out” is not persuasive
for at least three reasons: (1) Fischel’s interpretation of the purpose
underlying the Delaware’s cash-out exception may not be correct;38 (2) the

35
Fischel, supra note 12, at 885. Put another way, investors who hold publicly-
traded shares are just as susceptible to wealth appropriations through two-tiered tender
offers and freeze-out mergers as are investors whose shares are not publicly traded.
36
Id. The cash-out exception to the market out is set forth at Del. G.C.L.
§262(b)(2). That section provides as follows:
Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock of a
constituent corporation if the holders thereof are required by the terms of an
agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258,
263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository receipts
in respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
37
Id.
38
See infra Part II.B.7 (arguing that cash-out exception to the market out was
intended to restrict the rights of minority shareholders to challenge cash-out mergers, not
to expand them).

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cash-out exception does not completely eliminate the dissonance between
Fischel’s theory and the “market out,” since the exception fails to restore
appraisal rights where the consideration in a two-tiered tender offer or
freeze-out mergers takes the form of shares in the surviving corporation or
other publicly traded shares; and (3) the cash-out exception to the “market
out” is rare outside of Delaware.39
Third, Fischel’s theory of appraisal is inconsistent with the
traditional ability of shareholders to pursue derivative suits and class
actions alleging breach of fiduciary duty in cases, like freeze out mergers,
even when appraisal rights are available.40 Shareholder suits in these
circumstances serve precisely the same function that Fischel assigns to
appraisal rights: by assessing the adequacy of the consideration paid to the
shareholders in the challenged transaction, they set a minimum price at
which the firm, or a part thereof, can be sold; they therefore decrease the
likelihood of value decreasing transactions initiated by bidders and
controlling shareholders. In addition, shareholder derivative suits and
class actions arguably perform this function more effectively than do
appraisal rights. This is because appraisal statutes typically create
significant obstacles to shareholder recovery: shareholders must properly
perfect their appraisal rights by giving the corporation prior notice of their
intent to seek appraisal, by failing to vote in favor of the triggering
transaction, and by filing the appraisal action in a timely fashion;41
individual shareholders must file their own suits and bear their own
litigation expenses;42 and shareholders lose their voting and dividend

39
See Thompson, supra note 3, at 30.
40
See Lattin, supra note 4, at 599; see also Thompson, supra note 3, at 21. The
Delaware Supreme Court appeared to depart from the traditional rule in Weinberger v.
UOP, Inc., 457 A.2d 701 (Del. 1985), where the court held that “a plaintiff’s monetary
remedy [in a cash-out merger] ordinarily should be confined to the more liberalized
appraisal proceeding herein established.” Id. at 714 (emphasis added). But the court
greatly limited the reach of this aspect of its Weinberger decision in Rabkin v. P.A. Hunt
Chemical Corp., 498 A.2d 1099 (Del. 1985), where the court reversed the dismissal of a
shareholder class action challenging the fairness of a merger between a corporation and
its majority shareholder.
41
See Thompson, supra note 3, at 40 (summarizing the steps that dissenting
shareholders must take in most states in order to perfect appraisal rights).
42
See id. at 41 (noting that “[n]o provision is made for a class action or other
means that would permit shareholders in a common situation to share an attorney and
other expenses of litigation easily”).

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rights during the pendency of the proceeding.43 These obstacles ensure
that the minimum price set for a firm’s shares in an appraisal proceeding
will only be paid to a relatively small subset of the firm’s shareholders.
Bidders and controlling shareholders may therefore expect to succeed in
appropriating the wealth of a substantial percentage of the firm’s
stockholders, even in cases where appraisal rights are available.44 By
contrast, no such bars to shareholder recovery exist in shareholders
derivative suits and class actions, so bidders and controlling shareholders
are more likely to be forced to compensate all shareholders who are
harmed by their actions.
Finally, Fischel’s theory fails to adequately explain the distinctive
form of the appraisal remedy – a court ordered sale of the dissenter’s
shares to the corporation rather than an award of damages equal to the
difference between the “fair value” of the shares and the amount offered in
the challenged transaction. A “damages” remedy would serve the goal of
setting a “minimum price at which a firm, or a part of it, can be sold”45
equally as well as the traditional “buy-out” remedy, but would offer one
important advantage: because a damages remedy requires corporations to
raise less cash than a buy-out remedy, it entails a smaller risk that the cash
drain from appraisal will derail otherwise profitable corporate
transactions.46

43
See id. (noting that “[a]ppraisal litigation can drag on for a considerable time,
and some states, including Delaware, make no provision for minority shareholders to be
paid until the litigation is over”).
44
Fischel recognizes this problem with his theory. See Fischel, supra note 12, at
901. The practical difficulties of asserting appraisal rights (and, therefore, its inability to
function as an effective check on majority misconduct) have been frequently noted by
commentators. See, e.g., Frank H. Easterbrook & Daniel R. Fischel, Corporate Control
Transactions, 91 Yale L.J. 698, 731 n.96 (1982); Victor Brudney & Marvin A.
Chirelstein, Fair Shares in Corporate Mergers and Takeovers, 88 Harv. L. Rev. 297,
304-07 (1974); Melvin Eisenberg, The Legal Roles of Shareholders and Management in
Modern Corporate Decision Making, 57 Calif. L. Rev. 1, 85 (1969); James Vorenberg,
Exclusiveness of the Dissenting Stockholder’s Appraisal Right, 77 Harv. L. Rev. 1189,
1201 (1964); Manning, supra note 5, at 230-31; see also 2 Principles of Corporate
Governance, Pt. VII, Ch. 4, Reporter’s Note 3 to Introductory Note; cf. Thompson, supra
note 3, at 28 (noting that “[t]he transformation of appraisal into a remedy for self-dealing
does not easily fit with existing appraisal statutes”).
45
Fischel, supra note 12, at 876.
46
Cf. Manning, supra note 5, at 234-35 (noting that “[e]ven a relatively modest
number of shareholders claiming the appraisal remedy may constitute a severe economic
threat to the corporate enterprise,” since the “demand for a cash pay-out to shareholders

10

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 B. Kanda and Levmore
Although Kanda and Levmore do not extensively explore the
point, they recognize the lack of explanatory power of Fischel’s theory of
appraisal rights.47 Accordingly, they offer three different theories of
appraisal which they term “inframarginality,” “reckoning,” and
“discovery.” In Kanda and Levmore’s view, one or more of these theories
explains the various appraisal statutes in effect throughout the United
States.
1. Inframarginality
“Inframarginality” refers to the idea that all shareholders may not
“appreciate” their shares identically -- i.e., that some shareholders may
value their shares in excess of the marginal, or market, price.48 As a
result, the marginal, or market, price of shares may understate the average
value of shares. Kanda and Levmore suggest that some appraisal statutes
may be designed to protect such inframarginal values since they give
shareholders a remedy in cases where inframarginal values may be lost.
Kanda and Levmore offer Delaware G.C.L. §262 as their principal
example of an inframarginality statute.49 Delaware’s version of the
“market out,” they say, does a good job restricting appraisal to
transactions that are most likely to result in a net decrease in inframarginal
values: (1) transactions where shareholders give up thinly traded stock and
receive either widely traded securities or cash; and (2) transactions where
widely traded stock is exchanged for cash.50 In Kanda and Levmore’s
view, these transactions are most likely to result in a net loss of
inframarginal values because inframarginal values are more likely to be
present in thinly traded shares than in widely traded ones and should be
completely absent in the case of cash.51

often comes at a time when the enterprise is in need of every liquid dollar it can put its
hands on;” and that “[e]ven though the company may be economically very strong, it
may be unable to go ahead with the [appraisal-triggering transaction] at all if the
aggregated claim of dissenting shareholders under the appraisal statute comes to a high
figure”).
47
Kanda & Levmore, supra note 13, at 435.
48
Id. at 437-38.
49
Id. at 446-51.
50
Id. at 447.
51
Id. at 439-40.

11

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 Like Fischel’s theory, Kanda and Levmore’s inframarginality
theory of appraisal suffers from several serious flaws. First, the assertion
that some shareholders value their shares more highly than others (i.e., that
inframarginal values exist) is doubtful, particularly for widely traded
shares. As Easterbrook and Fischel explain, it is unlikely that different
shareholders will place different values on the same investment because
“[i]nvestors can make mutually beneficial trades until those holding any
given firm’s stock have reasonably homogeneous expectations about its
performance.”52
Second, even assuming that some shareholders value their shares
more highly than the market price, Kanda and Levmore’s theory fails to
fully explain the triggering provisions of even those statutes that they
identify as inframarginality statutes. For instance, Delaware’s appraisal
statute permits appraisal rights to be asserted where shareholders surrender
widely traded shares and receive thinly traded ones and where
shareholders trade thinly traded stock for thinly traded stock.53 But these
transactions pose little risk that inframarginal values will be lost.54
Third, Kanda and Levmore’s inframarginality theory conflicts with
the valuation principles traditionally applied in appraisal proceedings. To
protect any inframarginal values, the appraiser must be allowed to award

52
Easterbrook & Fischel, supra note 44, at 726-27.
53
See Del. G.C.L. §262(b).
54
Kanda and Levmore’s theory is also arguably inconsistent with Delaware’s
treatment of dissolutions and sales of substantially all the firm’s assets: both dissolutions
and asset sales can arguably result in the loss of inframarginal values, if, for instance,
shares are exchanged for cash, but appraisal rights are denied. But cf. Del. G.C.L.
§262(c) (providing that “[a]ny corporation may provide in its certificate of incorporation
that appraisal rights . . . shall be available for the shares . . . of its stock as a result of . . .
the sale of all or substantially all of the assets of the corporation”). Kanda and Levmore
offer somewhat unsatisfactory explanations for these anomalies in the Delaware statute.
With respect to transactions where publicly traded shares are exchanged for thinly traded
ones, Kanda and Levmore say “[such transactions] must be so rare that the statute can be
expected either to ignore [them] or to be suspicious enough to grant appraisal.” Kanda &
Levmore, supra note 13, at 448. Clearly the drafters of the Delaware statute did not
ignore these transactions, as the exception is explicit; why the drafters might be
suspicious of these transactions (apart from their relative rarity) is not explained. With
respect to transactions where thinly traded stock is exchanged for thinly traded stock,
Kanda and Levmore write as follows: “appraisal statues may well reflect a variety of
goals even while one goal alone makes them most comprehensible.” Id. at 451. This
explanation would be more convincing if Kanda and Levmore identified other provisions
of the Delaware statute which furthered goals other than inframarginality.

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some premium over the market, or marginal, value of the dissenter’s
shares.55 But, as the commentators note, cases that award dissenting
shareholders more than the pre-transaction market value for their shares
are rare.56 This traditional view is hardly surprising since most states
(including Delaware) define fair value in an appraisal proceeding as the
value of the shares on the day before the transaction exclusive of any
appreciation or depreciation attributable to the merger.57
Finally, like Fischel’s theory, Kanda and Levmore’s
inframarginality theory fails to adequately explain the distinctive form of
the appraisal remedy. As noted above, the traditional remedy in an

55
Id. at 451. A pure inframarginality statute would authorize the appraiser to
measure each dissenter’s idiosyncratic estimation of a share’s value. Id. But Kanda and
Levmore contend that inframarginality statutes are unlikely to include such broad
authorizations “because no objective evidence exists regarding an individual’s subjective
valuation.” Id. at 439. The authors then attempt to rescue their inframarginality theory
by arguing that “shareholders, legislators, and judges simply could understand that an
incantation which yielded an appraised value somewhat greater than the marginal market
value would do the job” of protecting inframarginal values, albeit “in only an inexact
way.” Id. Thus, Kanda and Levmore conclude, “some power to give more than marginal
value would be reassuring.” Id. at 451.
56
See, e.g., Manning, supra note 5, at 232 (noting that, at least where widely
traded shares are concerned, “courts have virtually refused to go beyond an inquiry as to
the market price on the date determined to be relevant”); Brudney & Chirelstein, supra
note 44, at 307 n.28 (noting that a portion of the gain attributable to the merger “has
never been included in valuation in appraisal proceedings”); see also Thompson, supra
note 3, at 20 & n.86 and at 35-36 & n.149 (citing Revised Model Business Corporation
Act §13.01 comment (1985) for the proposition that a majority of states adhere to the
goal of preserving minority shareholders prior rights as shareholders).
57
Since the early 1980s, some states, including Delaware, have modified their
appraisal procedures to allow appraisers to award a premium over the pre-merger value
of the dissenter’s shares. See Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983)
(authorizing courts to consider “elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the merger and not
the product of speculation”). This change is consistent with the view of Del. G.C.L. §262
as an inframarginality statute. However, at least two problems remain: first, the extent to
which Delaware law actually authorizes the award of a premium over the pre-merger
value of shares remains unclear, see Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (Del.
1996); and, second, because the current version of the Delaware appraisal statute pre-
dates the change in valuation rules by 15 years, it is difficult to conclude, as Kanda and
Levmore do, that the provisions of the Delaware statute are in any way motivated by a
desire to protect inframarginal shareholders. Cf. William J. Carney, Fundamental
Corporate Changes, Minority Shareholders, and Business Purposes, 1980 Am. B. Found.
Res. J. 69, 116-17 (arguing that appraisal is an inadequate check on conduct of
controlling shareholders because appraisal fails to protect inframarginal values).

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appraisal proceeding is a court ordered buy-out of the dissenter’s shares,
rather than an award of damages equal to the difference between the “fair
value” of the shares and the consideration offered in the challenged
transaction. A damages remedy would protect inframarginal values just as
well as a buy-out remedy, but, for the reasons noted earlier,58 would
expose corporations to a diminished risk of large cash drains that could
derail otherwise value-increasing transactions.
2. Reckoning
The second goal that Kanda and Levmore suggest for appraisal
statutes is “reckoning.” Kanda and Levmore begin their explanation of
“reckoning” by noting that shareholders need to monitor corporations in
order to evaluate managerial performance. But, they contend, monitoring
becomes difficult when fundamental change occurs in the middle of an
accounting period because “[t]he entity that emerges after the change may
be different enough from that managed before the change that much
information about the managers will be lost if the two experiences are
evaluated as one.”59 Appraisal, in their view, provides a potential solution
to this monitoring problem: “since appraisal of some shares requires
appraisal of the enterprise’s value as a whole,”60 “appraisal at the time of
the change . . . may serve as a point of ‘reckoning;’ prior performance is
reckoned and future performance can be judged from the bench mark
determined at appraisal.”61
Kanda and Levmore offer the Michigan and New Jersey appraisal
statutes as their principal examples of reckoning statutes.62 Both these
statutes allow shareholders of a target corporation in an acquisition to
enjoy appraisal rights unless the shares they give up are widely traded or
they receive either widely traded shares or cash.63 Kanda and Levmore
argue that this pattern of appraisal rights is entirely consistent with a

58
See supra note 46 and accompanying text.
59
Kanda & Levmore, supra note 13, at 441.
60
Id. at 442.
61
Id at 441.
62
Id. at 442-43 (Michigan) & 452-55 (New Jersey).
63
Id. at 442 (Michigan) & 453 (New Jersey). The market out under the
Delaware statute only applies in cases where dissenting shareholders give up widely
traded shares; unlike the New Jersey and Michigan statutes under consideration here, it
would not apply when thinly traded shares are exchanged for cash or widely traded
shares.

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“reckoning” goal: an acquisition is an appropriate point to reckon the
performance of target managers since the acquisition may so change the
target firm that it will be difficult to evaluate prior and future performance
without the bench mark established through an appraisal proceeding; but
appraisal rights are unnecessary when target shareholders either surrender
widely traded shares or receive widely traded shares or cash because the
bench mark for evaluating prior and future performance can be easily
established from the market value of the shares surrendered or the
consideration received.64
But while the reckoning theory of appraisal does a good job
explaining some basic features of the Michigan and New Jersey appraisal
statutes, the theory is undermined by its inconsistency with many of the
procedural aspects of those statutes. The reckoning theory, as explicated
by Kanda and Levmore, suggests that appraisal is designed to benefit
shareholders as a group by facilitating investor monitoring of managerial
performance. Accordingly, one would expect shareholders as a group to
be required to bear the costs of prosecuting appraisal actions and, perhaps,
to have the power to block or terminate appraisal actions if they
determined that the costs to the firm of a reckoning exceeded the benefits.
Instead, however, the Michigan and New Jersey statutes, like appraisal
statutes generally, give all decision-making authority with respect to the
appraisal proceeding to the dissenters and generally require dissenters to
bear their own expenses.65 This leads to a result which is difficult to
reconcile with Kanda and Levmore’s theory: reckonings of firm value may
be pursued when they impose net costs on shareholders and may be
foregone when they offer net benefits.66
In addition, like the other theories considered so far, the reckoning
theory of appraisal fails to explain why the remedy in appraisal takes the
form of a court ordered buy-out, rather than a damages award. A damages

64
Id. at 442 (Michigan) & 453 (New Jersey).
65
Mich. Stat. Ann. §450.1774 (Callaghan 1997); N.J. Stat. Ann. §14A:11-10
(West 1997).
66
Kanda and Levmore note the latter problem – that appraisal procedures might
lead reckonings to be foregone when they offer net benefits to shareholders. But they
conclude: “it may be that as an empirical matter the statutes’ disinclination to force
appraisal is no obstacle to the reckoning theme; there may always be at least one feisty or
selfless shareholder who does the job.” Kanda & Levmore, supra note 13, at 455.
However, Kanda and Levmore do not address the possibility that appraisal procedures
will lead to the overuse of the appraisal remedy.

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remedy would serve the reckoning goal equally as well as a buy-out since
it would still require a valuation of the entire enterprise as part of the
appraisal proceeding. But the cost of appraisal would be greatly reduced
because of the diminished risk that a cash drain from appraisal would
derail value-increasing corporate transactions.67
Finally, the reckoning theory is incapable of explaining the more
common form of appraisal statute which includes a market out that applies
when shareholders surrender widely-traded shares, but not when they
simply receive them. These statutes would provide for appraisal in many
instances when a reckoning through appraisal was unnecessary -- that is,
when a benchmark for evaluating prior and future performance could be
easily established from the market value of the consideration received.
3. Discovery
The third goal that Kanda and Levmore suggest for appraisal is
discovery. Kanda and Levmore assert that, while managerial and
shareholders interests are never perfectly aligned, mergers and other
fundamental changes may magnify the opportunities for managerial
misbehavior.68 In particular, they contend that, “[i]n the context of
fundamental corporate changes, which often trigger the appraisal
remedy,”69 managers may be tempted to sell corporate secrets to outsiders
“in return for attractive employment contracts or other consideration”70
instead of “bargain[ing] for bigger stakes on behalf of all shareholders.”71
Appraisal, they argue, may operate as a check on such misbehavior:
While the law probably should not aim to discover and reveal the
secrets [managers] may harbor, because often the revelation will
injure all shareholders and ultimately the economy as a whole, it
may hope through threat of appraisal to force from management
and the acquirer a large enough premium over market price to
dissuade potential dissenters and discourage inefficient

67
See supra note 46 and accompanying text.
68
Kanda & Levmore, supra note 13, at 443.
69
Id. at 456.
70
Id. at 456.
71
Id. at 443.

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 transactions and to roughly compensate shareholders for the secrets
that are theirs.72
Kanda and Levmore offer the New York appraisal statute as their
principal example of a discovery statute. Under New York law, “appraisal
is available, with no market exception, to the target’s shareholders in a
merger, as well as in [most] . . . sale[s] of assets . . . ,” and is available “to
the shareholders of a corporation that undergoes a charter amendment
seriously affecting shareholder rights.”73 This broad trigger, Kanda and
Levmore assert, ensures that appraisal will be available to shareholders
whenever “there is reason to worry both that managers are not serving
shareholders well as bargaining agents and that managers have secrets
about future opportunities or hidden values.”74 But, Kanda and Levmore
note, New York law withdraws appraisal rights when the assets of targets
are sold for cash and the sales are followed by liquidations. This, they
argue, is consistent with their theory because a “[cash sale followed by a
liquidation] is less prone to managerial exploitation since it involves
dispersing the target’s assets and terminating the employment of the
target’s management.”75 In Kanda and Levmore’s view, when target
management retire rather than continue in the surviving business, there is
little reason to doubt “their reliability as bargaining agents for the target
against the acquirer.”76
But Kanda and Levmore’s discovery theory of appraisal suffers
from two principal flaws. First, the discovery theory of appraisal lacks
explanatory power, even when applied to the triggering provision of the
New York appraisal statute. As just noted, the New York statute
withdraws appraisal rights from target shareholders when assets are sold
for cash and the sale is followed by a liquidation. Kanda and Levmore
base their defense of this withdrawal of appraisal rights on two premises:
first, that a transaction is more prone to exploitation if managers do not

72
Id. at 457.
73
Id. at 460-61 (emphasis in original). Kanda and Levmore argue that a market
out should not be expected in a discovery statute like New York’s because, when an
appraisal statute is based on the potential misuse of corporate secrets, “marketability is
hardly relevant since the market is unaware of these secrets and therefore offers little
help.” Id. at 459-60.
74
Id. at 460.
75
Id.
76
Id.

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retire, presumably because side payments for corporate secrets can be
more easily concealed in such cases; and second, that managers of firms
that liquidate are more likely to retire than managers of ones that do not.77
As Kanda and Levmore themselves acknowledge, this second premise (for
which Kanda and Levmore offer no evidentiary support) is highly
suspect.78 Accordingly, asset sales followed by liquidations seem at least
as susceptible to managerial exploitation as asset sales not followed by
liquidations. In addition, the New York statute provides for appraisal
rights for charter amendments when those amendments seriously affect
shareholder rights.79 This, too, is arguably inconsistent with a discovery
goal for appraisal because managers cannot easily use charter
amendments, by themselves, as vehicles for converting corporate secrets
into personal wealth.80
But even if the triggers of the New York statute more closely
matched Kanda and Levmore’s theory, a discovery goal for appraisal
would still be doubtful. For appraisal statutes to serve a discovery goal,
they must effectively deter the kind of managerial misconduct that is the
focus of Kanda and Levmore’s analysis – the sale of corporate secrets to
outsiders in exchange for attractive employment contracts or other
consideration. But this is unlikely. As noted above, appraisal statutes
typically create significant obstacles to shareholder recovery: shareholders
must properly perfect their appraisal rights by giving the corporation prior
notice of their intent to seek appraisal, by failing to vote in favor of the
triggering transaction, and by filing the appraisal action in a timely
fashion; individual shareholders must file their own suits and bear their
own litigation expenses; and shareholders lose their voting and dividend
rights during the pendency of the proceeding.81 These obstacles ensure
that only a relatively small subset of the firm’s shareholder will be able to
obtain compensation for the value of the corporate secrets sold by the
firm’s managers. Accordingly, appraisal rights, by themselves, are

77
Id.
78
Id. (noting that the “correlation between the firm’s liquidation and its
managers’ retirement” may not be strong).
79
N.Y. Bus. Corp. Law §806(d)(6) (Consol. 1997)
80
Kanda and Levmore assert that New York’s appraisal trigger for charter
amendments is consistent with their discovery theory, but fail to explain the point. Kanda
& Levmore, supra note 13, at 461.
81
See supra notes 41-43 and accompanying text.

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unlikely to prevent managers from diverting most of the value of corporate
secrets to themselves.82
As Kanda and Levmore themselves acknowledge, not one of the
three theories they offer can, by itself, explain the provisions of even a
single appraisal statute.83 In addition, each of their theories conflicts with
at least one of the basic provisions of the typical appraisal statute:
inframarginality is inconsistent with valuation principles that focus on pre-
transaction market value; reckoning is inconsistent with basic procedural
rules that give dissenters control over, and force dissenters to bear the
costs of, appraisal proceedings; and the discovery goal conflicts with the
market out. Accordingly, the likelihood that any of these concerns played
a large role in motivating drafters of appraisal statutes is small.
C. Gilson
Gilson attempts to explain appraisal by focusing on the
characteristics of the transactions that typically trigger the appraisal
remedy. In his view, appraisal triggering transactions generally share two
characteristics: (1) the ability, “by altering the asset makeup or leverage of
the company, or the businesses in which the company is engaged, to alter
the company’s beta in a fashion that the shareholders could not have
anticipated;”84 and (2) the presence of “final period” problems that render
market constraints on managerial self-dealing inoperative.85 Gilson infers

82
Kanda and Levmore suggest that appraisal might nonetheless deter managerial
misconduct because “appraisal itself will threaten to drain the corporation’s funds and
therefore may deter misbehavior by managers whose plans require the presence of these
funds.” Kanda & Levmore, supra note 13, at 444. Accordingly, unlike the other theories
considered so far, Kanda and Levmore’s discovery theory arguably explains why the
appraisal remedy takes the form of a buy-out rather than a damages award: a buy-out
maximizes the cash drain from appraisal and therefore increases the remedy’s deterrent
effect. But since transactions where the cash drain from appraisal is large enough to
derail the entire transaction are the exception rather than the rule, appraisal rights, by
themselves, still seem unlikely to prevent managers from diverting the value of corporate
secrets to themselves.
83
Id. at 463.
84
Gilson & Black, supra note 14, at 718. “Beta” measures the sensitivity of the
firm’s returns to market risk (i.e., the extent to which returns to the firm’s shareholders
fluctuate with movements in the market as a whole). See Brealey & Myers, supra note
16, at 160-62. So a change in a company’s beta means a change in the market risk
associated with an investment in that firm. See supra note 16.
85
Gilson offers the following explanation of the final period problem: “Simply
put, in a situation where parties expect to have repeated transactions, the recognition that
a party who cheats in one transaction will be penalized by the other party in subsequent

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from these characteristics that the purpose of appraisal is to “create a
substantial ex ante incentive for management to avoid uncompensated
alterations in beta” in circumstances where market constraints on
managerial misconduct may not function.86 This protection, Gilson
argues, is important because shareholders are not paid to take the risk of
unanticipated alterations in beta and that risk cannot be fully diversified
away.
Gilson’s theory of appraisal arguably does a better job than
competing theories of explaining the triggering provisions of the typical
appraisal statute. It explains why appraisal rights are triggered by
fundamental changes brought on by managers but not by fundamental
changes brought on by outsiders (the role of appraisal rights is to provide
managers with ex ante incentives to avoid misconduct, not to insulate
shareholders from risks they have been paid to take or can entirely
diversify away);87 it explains why shareholders of firms that sell
substantially all their assets ordinarily get appraisal rights, while
shareholders of firms that purchase those assets do not (managers of
selling firms are in their final period, where market constraints on
behavior may not function, while managers of purchasing firms are not);88

transactions reduces the incentive to cheat. However, when the transaction is the last (or
only ) in a series – that is, the final period – the incentive to cheat reappears because, by
definition, the penalty for doing so has disappeared.” Id. at 720. Translated into the
corporate context, managers are ordinarily constrained to act in the interests of
shareholders because a failure to do so will trigger post-transaction penalties in product
markets, capital markets, the market for managers, and the market for corporate control.
But when managers are in their final period, post-transaction market penalties are no
longer of concern. So managers in their final period are more likely to ignore shareholder
interests.
86
Id. at 720.
87
See id. at 718.
88
See id. at 720-21 (“In the context of an acquisition nothing stops target
management from selling out the shareholders in return for side payments from the
acquiring company because target management, by definition, will no longer be subject
to the constraints of the product, capital and control markets after the acquisition.
Perhaps more importantly, if the remaining professional careers of target management are
getting short, the size of the side payment may more than compensate them for any ex
post penalty imposed by the market for managers.”). This analysis also explains
provisions like Del G.C.L. 251(f), which generally deny appraisal rights to shareholders
of the firm that survives a merger if those shareholders end up owning at least 5/6 of the
combined firm. Cf. Thompson, supra note 3, at 10 (noting most states now have
provisions similar to Del. G.C.L. §251(f)). This allocation of ownership interests
suggests that the surviving firm is the acquirer and, therefore, that the managers of the

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and, unlike Fischel’s theory,89 it explains why appraisal rights might be
made available even in connection with arm’s-length transactions (even
though managers of merging firms may negotiate at arms-length, one or
both sets of managers may be in their final period).
But Gilson’s theory still shares many of the same problems that
plague competing theories of appraisal. First, like Fischel’s theory and
Kanda and Levmore’s discovery analysis, Gilson’s theory of appraisal
rights cannot account for the popularity of the market out. Under the
typical market out, appraisal rights are withdrawn from a firm’s
shareholders when their shares are publicly traded. This means that
shareholders of a publicly-held firm that sells substantially all its assets to
another firm (or that merges with another firm) would generally be denied
appraisal even though the transaction has the hallmarks of an appraisal-
triggering event – the ability to alter the company’s beta in a fashion that
the shareholders may not have anticipated and the presence of final period
problems that render market constraints on managerial conduct largely
inoperative.90
Second, like Fischel’s theory and Kanda and Levmore’s discovery
analysis, Gilson’s theory of appraisal is inconsistent with procedural
limitations on the appraisal remedy. As noted earlier, appraisal statutes
typically create significant obstacles to shareholder recovery so that only a
small number of shareholders can be expected to successfully assert
appraisal rights.91 Accordingly, since the threat from appraisal is small, the
capacity of the remedy to deter managerial misconduct should also be
small.
Third, like all the theories considered so far (other than Kanda and
Levmore’s discovery theory), Gilson’s theory cannot explain why the
appraisal remedy takes the form of a buy-out, rather than a damages

surviving firm are not in their final period. Accordingly, surviving-firm shareholders
have no need for appraisal rights.
89
See supra notes 28-31 and accompanying text.
90
The market out is not the only aspect of the triggering provisions of the typical
appraisal statute that Gilson’s theory fails to explain. In addition, Gilson’s theory cannot
explain why appraisal statutes are often triggered by charter amendments that alter the
purpose for which a corporation is organized: although such charter amendments clearly
pose a risk of altering the beta of a firm’s shares (if, for instance, they authorize the firm
to engage in a very different type of business from that authorized by the corporation’s
original charter), those amendments do not appear to involve final period problems.
91
See supra notes 41-44 and accompanying text.

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award. A damages remedy would serve the goal of “creat[ing] a
substantial ex ante incentive for management to avoid uncompensated
alterations in beta”92 equally as well as the traditional buy-out remedy,
but, as has been noted previously,93 would do so without exposing
corporations to an increased risk of large cash drains that could derail
otherwise value-increasing transactions.
Finally, Gilson’s theory faces one problem not shared by the other
theories of appraisal considered above: although Gilson correctly notes
that the appraisal remedy is limited to transactions that pose a risk of
substantially altering beta,94 he fails to provide a satisfactory theoretical
explanation for that limitation. Other final period transactions, apart from
the beta-altering transactions that trigger appraisal, can benefit managers
at the expense of shareholders. For instance, managers can simply
dissolve the firm and distribute an excessive portion of the assets to
themselves. Why provide shareholders with an appraisal remedy to check
one type of final period problem but not the other?
II. The Role of Appraisal Reconsidered
A. The Theory
The discussion in Part I leads directly to the basic question that is
the focus of the remainder of this paper: if appraisal statutes are not about
solving the problems identified by Fischel, Kanda and Levmore, and
Gilson, what are they about? The answer offered here focuses on the
effects, on shareholders who lack effective access to capital markets, of
transactions that alter the risk of the firm’s shares.95 As the discussion
below explains, when shareholders lack effective access to capital
markets, risk-altering transactions (particularly those which alter the
firm’s market risk96) can make some shareholders better off while leaving
others worse off.97 Appraisal rights require the corporation to compensate

92
Gilson & Black, supra note 14, at 720.
93
See supra note 46 and accompanying text.
94
See infra Part II.B.1.
95
For a definition of “risk,” see supra note 16.
96
For a definition of “market risk,” see supra note 16.
97
As was explained earlier, see supra note 18, transactions that alter a firm’s
unique risk will not ordinarily have any impact on investors because investors can
eliminate the unique risk associated with a particular security by holding a diversified
portfolio of investments. See Brealey & Myers, supra note 16, at 160. So most
investors care only about transactions which alter the firm’s market risk (i.e., the firm’s

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shareholders who may be harmed by such transactions and place the net
costs of providing that compensation on shareholders who otherwise gain.
As a result, shareholders who otherwise gain from appraisal triggering
transactions will only vote in favor of those transactions if their gains
more than offset the net costs of compensating objectors; appraisal rights
therefore decrease the probability of risk-altering transactions that result in
net losses to shareholders, causing all shares to trade at higher prices ex
ante..98
1. The Impact of Appraisal on Risk-Altering Transactions
To see how appraisal rights decrease the probability of risk-
altering transactions that result in net losses to shareholders, consider first
a world where shareholders who lack effective access to capital markets
are denied appraisal rights. In that world, the value of shares held by
particular investors, following a risk-altering transaction, will depend on
the investor’s personal taste for risk. Assume, for instance, that a
transaction increases both the risk of a firm’s shares and the firm’s
expected returns. Relatively less risk-averse shareholders (perhaps the
owners of a majority of the firm’s shares) may be made better off by that
transaction since those shareholders require relatively modest increases in
the firm’s expected returns to compensate for increased risk. In other
words, these shareholders may prefer the new combination of risk and
return to the old. But the extra returns from the risk-increasing transaction
may be insufficient to compensate relatively more risk-averse
shareholders. This is because these shareholders will require greater
compensation than their less risk-averse counterparts to offset the increase
in firm risk. So a risk-increasing transaction may be approved by owners
of a majority of the firm’s shares (or their representatives on the firm’s
board of directors) even though some shareholders are made worse off by
the transaction and the aggregate losses to shareholders exceed the gains.

sensitivity to movements in the market as a whole). But some investors are precluded
from fully diversifying their investment portfolios because they are required by practical
or legal considerations to invest a substantial portion of their wealth in a single company.
These investors will be affected by changes in unique risk, as well as by changes in
market risk. For purposes of the analysis that follows, a “risk-altering” transaction is one
that alters the type of risk (market risk and/or unique risk) that affects the firm’s
investors.
98
The theory set forth in this paper explains why appraisal might ordinarily be
in the interests of shareholders as a group; the theory does not, however, support the
proposition that appraisal rights should be mandatory for all firms.

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 The point can be illustrated with an example: Firm A is
considering undertaking a risk-increasing transaction. Assume Firm A
has two groups of shareholders: Group 1 consists of relatively less risk
averse shareholders who own 51 of the firm’s 100 outstanding shares and
believe that the risk-increasing transaction will increase the value of their
shares from $100 per share to $105 per share; Group 2 consists of
relatively more risk averse shareholders who own the remaining 49 shares
of the firm’s stock and believe that the risk-increasing transaction will
decrease the value of their shares from $100 per share to $90. Assume
further that the shareholders are precluded from selling their shares in
secondary markets, either because resales are legally restricted or because
the transaction costs of accessing secondary markets are prohibitive, and
that the corporation is unwilling to repurchase the 49 shares held by the
members of Group 2 at a price greater than $90 per share because the
transaction costs of issuing new shares to obtain the necessary cash would
make such a purchase unprofitable for the firm (i.e., the firm would have
to issue more than 49 new shares in order to obtain the cash necessary to
repurchase the 49 old shares at a price greater than $90 per share). In
these circumstances, Group 1 shareholders will favor the risk-increasing
transaction, while Group 2 shareholders oppose it. But since Group 1’s
shareholders own a majority of the firm’s stock, the transaction may well
be approved even though Group 2 shareholders are made worse off and
the aggregate losses to shareholders from the risk-altering transaction
exceeds the gains.99
But in a world with appraisal rights for risk-altering transactions,
the risk of this result is greatly reduced. Appraisal rights require the
corporation to purchase the shares of investors who object to the
transaction for a judicially determined “fair value,” which corporation
statutes generally define to mean the market value of the shares before the
announcement of the transaction from which the shareholders dissent (i.e.,
the pre-transaction value). By requiring the corporation to buy back
shares of objectors for their pre-transaction value, appraisal rights, in

99
Group 2 shareholders could, of course, try to convince Group 1 shareholders
to forego the risk-increasing transaction, which would provide $255 of gains to the Group
1 shareholders (51 shares times gain of $5 per share), by offering Group 1 shareholders a
side payment greater than $255. But the collective action problems of organizing such
an offer could cause the total cost to Group 1 shareholders to exceed the $490 loss that
would be avoided (49 times the potential loss of $10 per share if the transaction is
consummated). So the possibility of bargaining among groups of shareholders does not
eliminate the possibility of risk-altering transactions where losses exceed gains.

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effect, force the corporation to compensate objectors for their losses. The
net cost to the corporation of providing this compensation is equal to the
excess of: (a) the present value of the claims the firm must issue to obtain
the necessary cash to buy back the objectors’ shares; over (b) the present
value of the objectors’ shares. This net cost necessarily falls on the
shareholders who elect not to exercise appraisal rights -- i.e., those
shareholders who will keep their shares because they expect to gain from
the risk-altering transaction. Appraisal rights therefore ensure that those
who expect to gain from risk-altering transactions (or their
representatives) will only vote in favor of such transactions when their
gains are sufficient to cover the net costs of compensating the losers.100
These effects of appraisal rights can be illustrated by returning to
the example considered above. In a world where shareholders who lack
effective access to securities markets are provided with appraisal rights,
Group 2 shareholders can be expected to exercise those rights and demand
payment equal to the pre-transaction value of their shares -- $100 per
share. If the cheapest way for Firm A to obtain the necessary cash to
repurchase the objectors’ 49 shares is to issue new shares, the firm will
have to issue enough shares to raise a net amount of $4900 (49 shares
times $100 per share). Assuming that new investors attach the same value
to the firm as the Group 1 investors (100 times $105 or $10,500) and that
the transaction costs of issuance amount to 20% of the gross proceeds of
the offering, this means that the firm must sell 71.39 new shares to obtain
the $4900 necessary to compensate objectors. [71.39 shares will give the
new shareholders 58.33% of the firm (71.39/122.39). The new
shareholders will be willing to pay $6125, or $85.79 per share, for this
stake (58.33% of $10,500), and the firm will net $4900 (80% of $6125)
from the offering after expenses.]101

100
Shareholders who lack effective access to securities markets could behave
strategically with respect to appraisal rights. For example, a shareholder who might be
harmed by a risk-altering transaction if he had to retain his shares might nonetheless vote
in favor of the transaction so as to increase the likelihood of the appraisal-triggering
transaction and the corresponding opportunity to liquidate his investment. As a result of
this strategic behavior, the appraisal-triggering transaction might be approved by the
firm’s shareholders even though the losses to shareholders exceed the gains. But
appraisal statutes typically block such strategic voting behavior by requiring shareholders
who seek appraisal rights to either vote against the triggering transaction or abstain from
voting. (Since transactions that trigger appraisal typically require a vote of a majority of
all the outstanding shares, an abstention is the functional equivalent of a no vote.)
101
These amounts are computed in the following fashion. The first step is to
compute the percentage of the firm that must be sold to new investors to net $4900,

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 The cost to the corporation of compensating objectors in this
fashion is equal to the excess of: (1) the value of the new claims issued
($6125); over (2) the present value of the objectors’ shares following the
risk-altering transaction -- i.e., 49 shares times $105 per share or $5145; or
$980. This $980 cost to the corporation translates into a $980 expense for
the Group 1 shareholders: if the Group 1 shareholders wish to retain a
51% stake in the firm (and therefore avoid the dilution in the value of their
investment that would otherwise result from the new stock issuance), they
must purchase 11.42 of the 71.39 newly issued shares;102 this means a new
investment of $980 (11.42 shares times a market price of $85.79 per
share). Group 1 shareholders will therefore take the cost of compensating
objectors into account in deciding whether to undertake the risk-altering
transaction: if, as here, these costs ($980) are greater than the benefits to
the Group 1 shareholders (51 shares times a gain of $5 per share for a total
of $255), the Group 1 shareholders will vote against the risk-altering
transaction, thereby guarantying its defeat (since Group 1 investors own a
majority of the shares). So by ensuring that objectors will be compensated
for their losses and placing the net cost of providing that compensation on
shareholders who otherwise gain, appraisal rights ensure that risk-altering
transactions will only be undertaken when they are value-increasing.103
2. The Impact of Shareholder Access to Perfectly Competitive Capital
Markets

assuming that new investors attach a $10,500 value to the firm. That percentage is
computed by solving the following equation: X * ($10,500) [the gross proceeds raised by
the offering] - .2 * X * ($10,500) [the costs of the offering] = $4900. Solving for X
yields a value .5833 or 58.33%. This means that, following the offering, the 51 shares
held by the Group 1 shareholders must represent 41.67% of the total outstanding [100% -
58.33%], which means that: (1) the total number of shares outstanding after the offering
is 122.39 [.4167 times 122.39 equals 51]; (2) 71.39 new shares have been issued [122.39
minus the 51 retained by the Group 1 shareholders]; (3) the price per share of the newly
issued shares is $85.79 [$10,500/122.39 shares]; (4) the gross proceeds from the offering
are $6125 [$85.79 per share times 71.39 shares]; and (5) the net proceeds from the
offering are $4900 [.8 times $6125].
102
This will give the Group 1 shareholders a total of 62.42 of the 122.39
outstanding after the new stock issuance, or 51% of the total.
103
It should be noted that the benefits of appraisal rights come at a cost.
Although appraisal rights should prevent all risk-altering transactions that are value
decreasing, they can also be expected to block some risk-altering transactions that are
value increasing. This will happen if the benefits to shareholders who gain from a risk-
altering transaction exceed the costs to those whose lose, but these benefits are not
sufficient to fully offset the net costs of compensating objectors.

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 But the problem that this paper suggests appraisal rights are
designed to address -- dealing with transactions whose affects on
shareholders differ depending on the shareholders’ preferences for risk --
only arises when shareholders lack access to perfectly competitive capital
markets.104 When shareholders have access to perfectly competitive
capital markets, financial theory tells us that all shareholders will assess a
risk-altering transaction according to the same criterion: Is the expected
rate of return on the investment required for the risk-altering transaction
greater than the opportunity cost of capital, where the opportunity cost of
capital is defined as the rate of return on publicly traded securities that
have the same risk as the transaction under consideration?105 If the answer
to this question is yes, then all shareholders will agree that the risk-altering
transaction makes them better off; if, on the other hand, the answer is no,
then all will agree that the risk-altering transaction makes them worse off.
The explanation for these results follows. If a new project offers a return
for risk that is superior to the market rate of return (and therefore leads to
an increase in the market price of the firm’s shares), then even
shareholders who personally prefer the old combination of risk and return
to the new will benefit from the transaction. This is because these
shareholders can sell their shares at the increased market price which
results when the new project is undertaken, purchase a different
investment that has the risk and return features of the pre-transaction firm
for a lower price, and pocket the difference.106 If, on the other hand, a
new project offers a return for risk that is less than the market rate of
return (and therefore leads to a decrease in the market price of the firm’s

104
A perfectly competitive capital market is characterized by the following
conditions: (1) there are no barriers preventing access to the capital market and no
participant is sufficiently dominant as to have a significant effect on price; (2) access to
the capital market is costless and there are no frictions preventing the free trading of
securities; (3) relevant information about the price and quality of each security is widely
and freely available; and (4) there are no distorting taxes. See Brealey & Myers, supra
note 16, at 22.
105
See Brealey & Myers, supra note 16, at 14, 16 & 17-24.
106
This result depends on the fact that access to perfectly competitive capital
markets is costless. See supra note 104 (setting forth the conditions that must be satisfied
for capital markets to be perfectly competitive). If access to capital markets is not
costless, then there is no guarantee that investors will net a sufficient amount (after
deducting access costs) from selling their post-transaction shares to purchase new
investments with the risk and return features of the pre-transaction firm. In other words,
there is no guarantee that the net post-transaction sales price to shareholders will exceed
the pre-transaction market value of the firm’s shares.

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shares), then even those shareholders who personally prefer the new
combination of risk and return to the old will lose. This is because, had
the transaction not taken place, these shareholders could have sold their
shares for the higher pre-transaction market price, purchased a new
investment with risk and return characteristics of the post-transaction firm
for a lower price, and kept the difference for themselves.107 So when
shareholders have access to perfectly competitive capital markets, there is
no possibility that differing personal tastes for risk will result in differing
shareholder preferences with respect to risk-altering transactions -- that is,
access to perfect capital markets ensures that all shareholders will benefit
from transactions that increase the market value of their shares and all will
be harmed by transactions that decrease the market value of their shares.108
So under the theory advanced in this part of the paper there is no potential
problem for appraisal rights to address.
This result -- identical shareholder preferences for risk-altering
transactions --, however, only holds for perfectly competitive capital
markets. If, instead, shares of a firm are traded in capital markets that are
even slightly imperfect, then the personal taste of investors for risk can
again become relevant in determining the value of the shares held after a
risk-altering transaction and a role for appraisal can re-emerge. Consider,
for example, a risk-increasing transaction that offers a rate of return for
risk that is superior to the opportunity cost of capital and therefore
increases the market value of a share (i.e., the value of a share to the
marginal investor). If capital markets are imperfect (i.e., access to such
markets is costly), a rise in the marginal (i.e. market) value of shares will
not necessarily translate into a net post-transaction sales price that exceeds
pre-transaction value -- i.e., if market imperfections are sufficiently large,
the post-transaction market value of shares minus the cost of accessing
capital markets may be less than the pre-transaction value of shares.
Accordingly, there is no guarantee that sales of post-transaction shares
will generate sufficient cash (net of transaction costs) to purchase new
investments with risk and return features of pre-transaction shares. More
risk-averse shareholders, who prefer the old combination of risk and return
to the new, may therefore be made worse off by risk-increasing

107
This result also depends on the fact that access to perfectly competitive
capital markets is costless. See supra note 106 (which explains impact of positive access
costs).
108
This result assumes that shareholders have no other interest in the transaction
apart from their interests as shareholders.

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transactions, even though those transactions increase the market value of
shares, while less risk averse shareholders are made better off. A role for
appraisal therefore re-emerges. However, as markets more closely
approach perfection, the benefits from appraisal become smaller. This is
because access to capital markets, even imperfect ones, limits the losses
that particular shareholders might suffer as a result of risk-altering
transactions and therefore reduces the likelihood that the losses from risk-
altering transactions will exceed the gains.109
3. The Impact of Diversification by Shareholders
The problem that this paper suggests appraisal rights are designed
to address also disappears if: (1) shareholders hold investment portfolios
that are sufficiently diversified to eliminate the unique risk of their
investments (i.e., investment portfolios which include many other
securities in addition to the shares in the firm undergoing the risk-altering
transaction);110 and (2) a sufficient portion of the securities in those
investment portfolios are traded in capital markets which investors can
access at little or no cost. When these two conditions are satisfied, a risk-
altering transaction which results in an increase in the market value of the
firm’s shares is certain to make all shareholders better off, regardless of
the shareholders’ personal preferences for risk. This is because investors
who dislike the impact of the risk-altering transaction on the risk and
return attributes of their investment portfolios can readjust their portfolios
by buying and selling securities of other firms until the risk and return
characteristics of their original portfolios are restored. In particular, an
investor can sell securities or combinations of securities that have the
same risk and return features as the post-transaction shares and buy
securities or combinations of securities that have the same risk and return
features as the pre-transaction shares. This series of transactions should

109
For example, assume that in the example considered earlier, the market value
of Firm A’s shares rose from $100 per share to $105 per share as a result of the risk-
altering transaction. If the transaction costs of accessing capital markets equaled 10% of
the total sale price, then Group 2 shareholders, who personally preferred the old
combination of risk and return to the new, could sell their shares for a net price of $94.50
per share ($105 less $10.50 in transaction costs). These shareholders would, of course,
still be harmed by the risk-altering transaction, but the harm would be reduced from $10
per share (in the earlier example where shareholders were effectively precluded from
accessing capital markets) to $5.50 per share. If transaction costs were less than 10% of
the total sales price, the harm suffered by Group 2 shareholders would be smaller still;
and the harm would disappear entirely as transaction costs dropped below 5%.
110
See supra note 16 for a definition of unique risk.

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restore the risk and return attributes of the investor’s pre-transaction
portfolio, while leaving the investor better off than if the risk-altering
transaction had never taken place. The latter result follows because: (1)
the securities the investor sells in order to rebalance her portfolio
(securities with the risk and return characteristics of the post-transaction
shares) have a higher market value than the securities the investor
purchases (ones with risk and return features of the pre-transaction
shares);111 and (2) the transaction costs of trading securities are assumed to
be negligible. Accordingly, under the condition noted above, risk-altering
transactions that increase the market value of a firm’s shares are certain to
make all shareholders better off, even if the particular shares affected by
the risk-altering transaction cannot be easily sold in capital markets. So
appraisal rights need not be provided to ensure that the gains to some
shareholders more than offset the losses to others.
Consequently, a role for appraisal for cases where shareholders
lack effective access to capital markets only remains if one of the two
conditions noted at the beginning of the preceding paragraph is not
satisfied. In fact, this may frequently be the case. Investors who hold
shares that cannot be easily sold in capital markets (such as shares of a
closely-held, family business) will often have a substantial portion of their
wealth invested in those shares. As a result, these investors may not be
sufficiently diversified to eliminate the unique (or firm-specific) risk of
their investments, as the first condition in the preceding paragraph
requires. When this occurs, there can be no guaranty of a portfolio
readjustment strategy that will leave the investor better off than if the risk-
altering transaction had never taken place: first, if the investor has
disproportionate amount of her wealth invested in unmarketable securities,
it may not be possible for the investor to fully offset the effects of the risk-
altering transactions by changing the ways in which her remaining wealth
is invested; and second, even if readjustment is possible, the costs of
readjustment may well exceed the gains. This is because many of the
trades necessary to readjust portfolio risk of an undiversified portfolio will

111
Note in this regard that we have assumed the risk-altering transaction
increases the market value of the firm’s shares (i.e., that shares with the risk and return
features of the post-transaction firm have a higher market value than shares with the risk
and return features of the pre-transaction firm). This assumption seems reasonable
because: (1) managers are constrained by market and legal forces to act consistently with
shareholder interests (i.e., to pursue value-increasing transactions, rather than value-
decreasing ones); and (2) owners of a majority of the firm’s shares cannot be expected to
approve transactions that result in a decrease in share value.

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be designed solely to readjust the unique risk of that portfolio. These
trades are sure to generate net losses for investors, because securities with
the same market risk, but different unique risk, will sell for the same
price.112 So the trades designed to adjust unique risk will produce no
trading gains to offset their positive transactions costs.
The result, then, is that the costs of readjusting the portfolio’s
unique risk may more than offset the benefits from readjusting a
portfolio’s market risk. So the possibility of rebalancing a portfolio after a
risk-altering transaction does not eliminate the risk that some shareholders
will benefit from risk-altering transactions, while others lose. A role for
appraisal in ensuring that risk-altering transactions produce net gains for
shareholders therefore remains.
4. The Costs of Appraisal
The benefits of appraisal in ensuring that risk-altering transactions
produce net gains in cases where shareholders lack access to perfectly
competitive capital markets, of course, come at a cost. As was explained
above,113 although appraisal rights should prevent all risk-altering
transactions that are value decreasing, they can also be expected to block
some risk-altering transactions that are value increasing. This will happen
if the benefits to shareholders who gain from a risk-altering transaction
exceed the costs to those whose lose, but these benefits are not sufficient
to fully offset the net costs of compensating objectors. In addition, since
the number of shareholders who will seek appraisal, and therefore the
amount of cash which must be raised, cannot be easily predicted in
advance, appraisal rights introduce new uncertainty into the job of
planning corporate transactions. So if the view of appraisal rights
advanced this part of the paper is correct, appraisal rights should only be
available in those circumstances where the gains from appraisal are
relatively large: where transactions have a substantial impact on the risk of
a firm’s shares and the impediments blocking shareholder access to capital
markets are large.
5. Summary

112
See Brealey & Myers, supra note 16, at 179-83 (explaining the Capital Asset
Pricing Model which posits that a security’s price depends only the security’s sensitivity
to market risk).
113
See supra note 103.

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 The foregoing thus provides a new theoretical explanation for
appraisal rights. Under this theory, appraisal rights are designed as a
vehicle for resolving conflicts among shareholders with differing
preferences for risk, conflicts which exist even when managers act in
accordance with their fiduciary duties to shareholders by only approving
transactions that result in increases in the market value of the firm’s
shares.114 Accordingly, this theory carves out for appraisal a function that
the law of fiduciary duties does not, and cannot, serve: ensuring that
transactions which have differing effects on shareholders depending on
their personal preferences for risk produce net gains for shareholders.115 It
therefore overcomes one of principle limitations of competing theories,
particularly those of Fischel and Gilson, which view appraisal simply as a
check on misconduct by managers and controlling shareholders.
B. Consistency of Theory with the Basic Features of Appraisal
But despite the advantages of the theory offered in Part II.A. over
its competitors, one basic empirical question remains: Are terms of
traditional appraisal statutes consistent with the theory? An examination
of the principal features of appraisal statutes suggests that the answer is
yes.
1. Appraisal Triggers
First, as noted earlier, appraisal rights are typically triggered by
mergers, sales of all or substantially all the firm’s assets (other than in
connection with dissolutions), and “serious” charter amendments, such as
those that alter the corporation’s fundamental purposes. Each of these
transactions poses a significant risk of substantially altering the risk of the
firm’s shares: A merger will alter the risk of the firm’s shares if, for

114
Note, in this regard, that the principal example in Part II.A.1 involved a risk-
altering transaction which resulted in an increase in the market value of the firm’s shares
but nonetheless resulted in net losses for shareholders as a group.
115
To handle this problem in a breach of fiduciary duty action, the court would
have to calculate the difference between pre- and post-transaction values for each of the
firm’s shareholders. This could be expected to result in a proceeding of enormous
complexity because, in instances where appraisal rights are triggered (i.e., where
transactions have a substantial impact on the risk of the firm’ shares and impediments
blocking shareholder access to capital markets are large), the post-transaction value of a
share can be expected to vary from investor to investor depending on the particular
investor’s taste for risk. So a separate calculation would have to be made for each of the
firm’s shareholder. As is explained in sub-part II.B.4 below, the appraisal action
overcomes this problem by providing for a buy-out remedy, rather than a damages
remedy.

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instance, the merger partner has a very different sensitivity to market risk
than does the original firm; a sale of all (or substantially all) the firm’s
asset will alter the risk of the firm’s shares if the proceeds of the sale are
invested in assets that differ markedly from those sold; and a charter
amendment will result in the alteration of the share risk if, for instance, it
authorizes the firm to engage in businesses that are very different from
those authorized in the original charter.116
At the same time, transactions that pose a lesser risk of
substantially altering share risk are commonly excluded from the appraisal
statute’s triggering provisions. For instance, most appraisal statutes
contain a provision similar to Del. G.C.L. §251(f),117 which denies
appraisal rights to the acquiror’s shareholders when a merger leaves the
acquiror’s shareholders with at least 5/6th of the equity of the firm
surviving the merger. This makes sense because such an allocation of
shares suggests that the surviving firm does not differ greatly from the
acquiring firm and therefore that the risk of the acquiror’s shares has not
been greatly altered by the transaction. Similarly, most appraisal statutes
that grant appraisal rights to the shareholders of a firm that sells all (or
substantially all) its assets deny appraisal rights to shareholders of the
purchasing firm. This distinction is also consistent with the theory.
Shareholders of the selling firm may see one group of assets completely
replaced by another if, for instance, the proceeds of the sale are used to
invest in an entirely new line of business. A substantial alteration in share
risk is therefore quite possible. But shareholders of the purchasing firm
are less likely to see the risk of their shares substantially altered. This is
because the purchasing firm’s existing assets are combined with new
assets, rather than being completely replaced by them.
Finally, as expected, most appraisal statutes withdraw appraisal
rights in connection with dissolutions.118 Dissolutions will ordinarily take
the form of a sale of the corporation’s assets followed by a distribution to
the firm’s stockholders of the cash remaining after all the firm’s creditors
have been paid. A transaction, like the ordinary dissolution, which
provides each shareholder with an identical amount of cash per share

116
Gilson also argues that appraisal-triggering transactions are characterized by
their capacity to alter the risk (specifically, the market risk) of the firm’s shares. See
supra note 84 and accompanying text.
117
See Thompson, supra note 3, at 10.
118
See Manning, supra note 5, at 250-51.

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presents no risk of affecting different shareholders differently depending
on their preferences for risk, since each shareholder will attach the same
value to the consideration (i.e., cash) received for their shares. So under
the theory advanced in Part II.A. above, there is no problem for appraisal
rights to address.119
2. The Market Out
Second, most appraisal statutes now provide for a “market out.”
Under the earliest versions of the “market out,” which appeared in the
1960s, appraisal rights were withdrawn with respect to shares that were
listed on a national securities exchange, such as the New York Stock
Exchange, or that were held of record by more than 2000 holders. More
recent versions of the market out go even further, extending the market out
to shares that are traded on the NASDAQ Stock Market.120
The emergence and subsequent expansion of the market out is
perfectly consistent with the theory set forth above. As noted earlier, the
benefits from appraisal become less substantial when capital markets more
closely approach perfection. In the 1890s, when appraisal rights first
appeared without market outs, public securities markets, such as the New
York Stock Exchange, were far from perfect. Accordingly, appraisal
rights offered large gains, even for firms whose securities were traded in
those markets. By the 1960s, national securities exchanges, like the New
York Stock Exchange, had achieved much higher levels of efficiency. As
a result, the gains from appraisal rights for firms whose shares were traded
on those securities exchanges became considerably smaller in relation to
the costs and a market out withdrawing appraisal rights for those shares
emerged. In more recent years, the efficiency of public securities markets,
including the principal over the counter markets, has continued to
increase. The continued expansion of the market out, to include securities
traded in the NASDAQ Stock Market, can be understood as a reflection of
the increasing efficiency of these markets.
3. Valuation Rules
Third, appraisal statutes typically provide that shareholders who
opt for appraisal be awarded the pre-transaction value of their securities.
This is exactly the result one would expect if, as is argued here, the goal of

119
For an explanation of why Delaware nonetheless provides for appraisal rights
in connection with cash-out mergers, see infra Part II.B.7.
120
See, e.g., Del. G.C.L. §262(b)(1).

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appraisal is to ensure the gains from appraisal-triggering transactions
exceed the losses. As explained above, awarding objecting shareholders
the pre-transaction value of their shares has the effect of shifting to the
firm’s other shareholders the cost of compensating objectors for the losses
they suffer as a result of the risk-altering transaction. Accordingly, this
valuation measure ensures that shareholders will vote in favor a risk-
altering transaction only if the gains to shareholders exceed the costs of
making the losers whole.
By contrast, a valuation measure which gives objectors more than
pre-transaction value -- such as a measure that gives objectors a share of
the gains that result from risk-altering transactions – risks derailing value-
increasing corporate transactions. This is because a higher price per share
for objectors translates into a higher net cost to the corporation of
compensating objectors through appraisal. This, in turn, means a greater
risk that the net cost of compensating objectors will exceed the gains to
non-objecting shareholders, leading non-objecting shareholders to vote
against the transaction, even though gains to shareholders from the risk-
altering transaction exceed losses. For example, assume a transaction
increases the market value of the firm’s 100 outstanding shares from $100
per share to $105 per share, but the owners of 49 of the firm’s shares
dissent from the transaction because they feel it decreases the value of
their shares from $100 to $99 dollars. If the appraiser ordered that the
dissenters be paid $105 per share, rather than the pre-transaction value of
$100 per share, the transaction might nonetheless be defeated even though
it clearly produces net gains for the shareholders. This would result if the
transactions costs of issuing new shares in order to get the cash necessary
to compensate objectors amounted to more than 4.72% of the gross
proceeds of the offering, since the net costs of the compensating objectors
under those circumstances would more than offset the $255 gain (51
shares times $5 per share) non-objecting shareholders expected to receive
from the transaction.121

121
To net the $5145 necessary to compensate objectors (49 shares time $105 per
share) after paying transaction costs equal to 4.72% of the offering, the company would
have to sell new shares with a total market value of $5400 ($5400 minus 4.72% of $5400
equals $5145). This means the company would have to sell new investors 51.43% of the
company (51.43% of 10,500 equals $5400). The net cost to the company of making such
an offering is equal to: (1) the market value of the new shares sold ($5400) minus (2) the
market value of shares repurchased from objectors (49 times $105 per share equals
$5145), or $255. This net cost exactly offsets the gain that non-objecting shareholders
would have received absent the exercise by objectors of appraisal rights (51 times $5 per
share or $255). So if transaction costs exceed 4.72%, the majority of the firm’s

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 4. Form of the Remedy
Fourth, appraisal statutes uniformly provide for a buy-out of the
objectors’ shares rather than an award of damages in amount sufficient to
compensate objectors for their losses. Like the other aspects of appraisal
statutes already considered, the form of the remedy is easily explained if,
as is argued above, appraisal is designed to ensure that the gains from risk-
altering transactions exceed the losses. To effectively implement a
damages remedy that would serve this purpose, a court would have to
calculate the difference between pre- and post-transaction values for each
objecting shareholder. This could be expected to result in a proceeding of
enormous complexity for at least two reasons: first, in instances where
appraisal rights are triggered (i.e., where transactions have a substantial
impact on the risk of the firm’ shares and impediments blocking
shareholder access to capital markets are large), the post-transaction value
of a share can be expected to vary from investor to investor depending on
the particular investor’s taste for risk,122 so a separate damages calculation
would have to be undertaken for each objecting shareholder; and second,
as Kanda and Levmore note, “if appraisal is meant somehow to account
for [subjective] values, then appraisers are faced with a terribly difficult
valuation problem, because no objective evidence exists regarding an
individual’s subjective valuation.”123
A buy-out remedy, on the other hand, achieves the goal of
compensating objectors for the losses they suffer with relative ease. To
implement a buy-out remedy, a court need only calculate the pre-
transaction value of the firm’s shares, a task which should be relatively
simple in the ordinary case since pre-transaction value can be determined
by reference to the market price of the firm’s shares before the
announcement of the triggering transaction;124 unlike the damages

shareholders can be expected to vote against the transaction even though it offers net
gains to shareholders in the absence of appraisal rights.
122
See supra Part II.A.
123
Kanda & Levmore, supra note 13, at 439.
124
Cf. Manning, supra note 5, at 232 (noting that, at least where widely traded
shares are concerned, “courts [in appraisal proceedings] have virtually refused to go
beyond an inquiry as to the market price on the date determined to be relevant”). Pre-
transaction value should be the same for all shareholders because shareholders who elect
to invest in a particular type of firm (rather than having that investment forced upon them
by directors and/or other shareholders) should have relatively homogenous expectations
regarding firm value. See Easterbrook & Fischel, supra note 44, at 726-27 (noting that

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alternative, no calculation of subjective, post-transaction values is
required. Admittedly, a buyout remedy suffers from one important
disadvantage: because a buy-out remedy requires a corporation to raise
more cash than a damages remedy, it entails an increased risk of a cash
drain that will derail an otherwise profitable corporate transaction. But
this disadvantage of a buy-out remedy is relatively minor when compared
with the extreme calculation problems posed by the damages alternative.
5. Appraisal Exclusivity
Fifth, appraisal statutes (or court decisions interpreting those
statutes) traditionally provide that the availability of an appraisal remedy
in connection with a particular transaction does not preclude a
shareholders’ suit alleging breach of fiduciary duty from being maintained
in connection with the same transaction.125 This too is consistent with the
theory. The breach of fiduciary duty action is designed to ensure that
corporate decision-makers -- be they directors or controlling shareholders
-- have acted consistently with their duties to the firm’s shareholders. In
the context of arms-length transactions (such as a sale of the corporation to
an unaffiliated firm), this duty ordinarily requires corporate decision-
makers to strive to obtain the best price reasonable attainable,126 not
simply a price that exceeds the pre-transaction market value of the firm’s
shares;127 in the context of a conflict of interest transaction (such as a sale

“[i]nvestors can make mutually beneficial trades until those holding any given firm’s
stock have reasonably homogeneous expectations about its performance”).
125
See Thompson, supra note 3, at 43; see also Lattin, supra note 4, at §162.
But cf. Thompson, supra note 3, at 24 (noting that courts in twelve states have held
appraisal to be exclusive). In Weinberger v. UOP Inc., 457 A.2d 701 (Del. 1983), the
Delaware Supreme Court held that, in the absence of fraud or illegality, the appraisal
remedy would “ordinarily” be exclusive. But since Weinberger, the Delaware courts
have routinely interpreted the exception to appraisal exclusivity broadly. See, e.g, Rabkin
v. P.A. Hunt Chemical Corporation, 498 A.2d 1099 (Del. 1985) (permitting plaintiffs to
proceed with a breach of fiduciary duty action where defendants were “charged with bad
faith which goes beyond issues of ‘mere inadequacy of price’”). Indeed, in the decade
following Weinberger, there were at least eleven reported Delaware decisions applying
the fair dealing/fiduciary duty standard in cases appraisal rights were available. See
Thompson, supra note 3, at 24 & n.102.
126
See, e.g., Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d
173, 182 (Del. 1986).
127
Cf. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) (finding that directors
breached their fiduciary duty to the shareholders in connection sale of the company, even
though sale price of $55 per share represented a 48% premium over the stock’s last
closing price).

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of the corporation to its controlling shareholder), this duty generally
translates into an obligation to treat minority shareholder “fairly,”128 a
requirement which may or may not require the sharing of gains with the
minority shareholders.129 An appraisal action that is designed to ensure
that gains from risk-altering transactions exceed losses does little to
advance these goals. As the discussion above explains, such an appraisal
action only ensures that appraisal-triggering transactions are value-
increasing; it does not ensure that triggering transactions are value-
maximizing – that is, that net gains are as large as possible. Nor can a
traditional appraisal action, by itself, protect minority shareholders from
unfair treatment by majority shareholders, since the pre-transaction value
of the minority’s shares will necessarily be discounted to reflect the
potential for unfair actions by the majority. Accordingly, since the
appraisal remedy cannot ensure that corporate decision-makers act in
accordance with their fiduciary duties to shareholders, the traditional view
– that the availability of appraisal does not preclude a breach of fiduciary
duty action – makes good sense.130
6. Appraisal Procedures
Finally, the appraisal remedy is marked by a number of procedural
rules that distinguish it from the more common, shareholders’ derivative
suit or class action. These include: (1) the obligation of individual
shareholders to expressly opt-in to an appraisal action; (2) the
cumbersome procedures for perfecting appraisal rights; and (3) the

128
See generally Ribstein & Letsou, supra note 32, at §9.04.
129
Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (Del. 1996), suggests that the
sharing of gains with minority shareholders may required in at least some cases.
130
By the same token, the availability of a breach of fiduciary duty action should
not (and does not) preclude the exercise of appraisal rights. As is explained above, the
breach of fiduciary duty action is designed to ensure that corporate decision-makers get
the best price reasonably attainable for the shareholders – that is, to ensure that corporate
transactions are value maximizing. But, as Part II.A. explains, in circumstances where
shareholders lack effective access to capital markets, actions that maximize the market
value of a firm’s shares may not necessarily be value increasing – that is, where
shareholders lack effective access to capital markets, some shareholders may be harmed
by transactions that increase the market value of the firm’s shares and these losses may
well exceed the gains realized by others. So appraisal rights are not made obsolete by
the availability of an action for breach of fiduciary duty. In short, as was noted earlier,
under the view of appraisal rights advanced herein, appraisal and the law of fiduciary
duties serve completely separate and distinct function. See supra note Error! Bookmark Willamette University 1/5/10 2:03 PM
not defined. and accompanying text.
Deleted: 115

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designation of the corporation as the respondent in the action. The
discussion that follows reconciles these rules with the purposes of
appraisal identified in Part II.A above.
a. Opt-In
Appraisal statutes typically permit only those shareholders who
expressly elect appraisal (in the manner provided in the state appraisal
statute) to share in the statutory remedy. These rules are in marked
contrast to those governing shareholders’ derivative suits and class
actions, where shareholders automatically share in judgments even if they
never take any formal steps to join the action.131
The opt-in nature of the appraisal remedy is entirely consistent
with the purpose of appraisal outlined above. The appraisal remedy is
designed to deal with transactions that have differing impacts on different
shareholders -- i.e., transactions that make some shareholders better off,
while leaving others worse off. Consequently, there is no reason to infer
from the filing of an appraisal action by one shareholder that all others (or
indeed any others) wish to pursue the remedy. In fact, one would expect
just the opposite: those shareholders who feel they have been made better
off by the transaction (i.e., those who feel that the post-transaction value
of their shares exceeds the pre-transaction value) will wish to retain their
shares rather than sell them back to the corporation for their pre-
transaction value.
By contrast, a shareholders’ derivative suit or class action alleging
breach of fiduciary duty is based on the claim that the firm’s managers
could have taken steps to make the challenged transaction even more
favorable to the corporation. If that claim is correct, then the value of all
the firm’s shares has been depressed by the managers’ actions. All
shareholders could therefore be expected to wish to join in the action,
assuming, of course, that the expected benefits to shareholders from
pursuing the action exceed the expected costs. Accordingly, there is little
reason to adopt an appraisal-like opt-in procedure which requires all
shareholders to affirmatively state that they wish to join the derivative suit,
particularly if procedural rules ensure that shareholder derivative suits and

131
In a successful derivative suit, damages are paid to the corporation, not to the
individual shareholder plaintiffs. So all shareholders share in the benefit that a derivative
action produces through an increase in the value of their shares. See generally Ribstein &
Letsou, supra note 32, at 574.

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class actions will not proceed when they are contrary to shareholder
interests.132
b. Perfecting Appraisal Rights
Appraisal statutes typically set forth a complicated (and
cumbersome) procedure for perfecting appraisal rights. Each shareholder
seeking appraisal must notify the corporation of that desire before the
triggering transaction; when the time for voting on the transaction arrives,
the shareholder must vote no or abstain from voting; and finally, the
shareholder must file a petition requesting appraisal with the appropriate
court within a relatively short period of time following the consummation
of the triggering transaction. Failure to take any of the appropriate steps at
the appropriate times can result in the shareholder’s loss of the remedy,
even if the court ultimately determines the fair value of the shares in
connection with a properly perfected appraisal action commenced by a
different shareholder. These rules have been frequently criticized as
unduly burdensome,133 but the theory of appraisal set forth above suggests
some good explanations for their adoption.
i. Pre-Vote Notification
Pre-vote notification serves the purpose of informing managers and
shareholders of the maximum number of shares that might seek appraisal
rights in connection with a particular transaction. This information can
then be used to determine the maximum cost to the corporation of
compensating objectors.134 With this cost calculated, managers and
shareholders can better determine, before a vote is taken, whether the
potential gains to shareholders from an appraisal-triggering transaction
will more than offset the net costs of compensating objectors.
Consequently, appraisal is more likely to achieve its goal of preventing
risk-altering transactions that impose net costs on shareholders: if, as a

132
For a discussion procedural rules that screen out “bad” derivative suits, see
Ribstein & Letsou, supra note 32, at §§10.03-10.05.
133
See, e.g., 2 American L. Inst., Principles of Corporate Governance: Analysis
and Recommendations, Pt. VII, at 296 (1994) (“the procedures surrounding the exercise
of the appraisal remedy have long been viewed as so cumbersome and time-consuming as
to deter all but the largest and most determined shareholders”); Joel Seligman,
Reappraising the Appraisal Remedy, 52 Geo. Wash. L. Rev. 829, 829 (1984) (noting that
“the costs, risks and time delays of an appraisal usually dissuade all but the wealthiest of
plaintiffs from demanding a valuation”).
134
See supra text accompanying notes 99-100.

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result of the pre-vote notification procedure, managers and shareholders
determine that the benefits to non-objecting shareholders will be less than
the net costs to the corporation of compensating objectors, either the
firm’s managers can abandon the transaction in advance of the vote (thus
saving the expenses associated with a full-blown proxy solicitation), or
shareholders not seeking appraisal rights can vote against the transaction,
thereby ensuring its defeat. Without any pre-vote notification of objector
intentions managers and shareholders would face considerable uncertainty
in deciding on appraisal-triggering transactions. As a result, some risk-
altering transactions that imposed net costs on shareholders might be
approved, while others that provided net benefits could be defeated.
ii. Voting by Objectors
When the time for a vote on the appraisal-triggering transaction
arrives, shareholders planning to assert appraisal rights with respect to
their shares must ordinarily vote “no” or abstain from voting. (Since
transactions that trigger appraisal rights typically require an affirmative
vote of a majority of all the outstanding shares, an abstention is the
functional equivalent of a “no” vote.) The reason for this voting rule was
suggested earlier.135 Without such a rule, shareholders who would be
harmed by a risk-altering transaction if they had to retain their shares
might nonetheless be tempted to vote in favor of the transaction so as to
increase the likelihood of gaining an opportunity to liquidate their
investment.136 As a result, risk-altering transactions could often be
approved even though the losses to shareholders from those transactions
exceed the gains. A rule requiring objectors to either vote “no” or abstain
from voting eliminates this risk.
iii. The Appraisal Petition
In addition to notifying the corporation of his intention and then
voting no (or abstaining from voting) on the triggering transaction, the
shareholder seeking appraisal must typically file a petition requesting
appraisal with the appropriate court within a relatively short period of time
after the triggering transaction – e.g., 120 days under Delaware law. The
speed with which an appraisal action must be filed is difficult to explain if

135
See supra note 100.
136
This temptation is particularly strong in the case of appraisal-triggering
events because, as noted earlier, the appraisal remedy is only available in instances where
shareholders lack effective access to capital markets – i.e., when shareholders hold
relatively illiquid investments.

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appraisal is designed to deter misconduct by managers or controlling
shareholders, as many of the theories discussed in Part I suggest. This is
because sufficient evidence of wrong-doing to justify the costs and risks of
pursuing an appraisal action may not be discovered within the short period
provided for filing a petition.
But a short petition period poses few, if any, problems to the
theory of appraisal advanced above. Under that theory, shareholders
considering the exercise of appraisal rights need only answer one question:
are the risk and return attributes of the post-transaction firm (assuming the
transaction is consummated in the manner described by the firm’s
managers) less desirable than the risk and return attributes of the pre-
transaction firm? In answering this question, shareholders need not
concern themselves with investigating the accuracy of management’s
statements since shareholders will have a separate remedy if managerial
misstatements lead to incorrect decisions regarding appraisal rights.137
Nor need shareholders concern themselves with the question of whether
managers might have obtained a better deal for the shareholders with
greater effort or diligence since, should evidence of managerial
misconduct arise, objectors should be able commence a separate action for
breach of fiduciary duty.138 Accordingly, shareholders should be able to
decide whether to exercise appraisal rights relatively quickly by
discounting the firm’s expected returns at the appropriate rate given their
personal tastes for risk.
c. Corporation as Defendant
An appraisal action is prosecuted against the corporation, rather
than against the firm’s managers. If appraisal is viewed as a device for
policing managerial misconduct, this aspect of the remedy, like many
others discussed earlier, is difficult to explain. If, for instance, appraisal
rights are designed to prevent managers from selling the firm’s assets for
too low a price, as Gilson suggests, why not require the managers (or their
liability insurers) to pay over the incremental amounts that would have

137
See Thompson, supra note 3, at 43 (noting that even those statutes that make
the appraisal remedy exclusive ordinarily contain exceptions that “clearly preserve a
shareholder’s action for a direct misrepresentation that leads to failure to exercise
appraisal rights”).
138
See, e.g., Cede & Co. v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988)
(permitting shareholder who had commenced an appraisal action to commence a breach
of fiduciary duty action when credible evidence of managerial misconduct was
uncovered).

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been obtained by more aggressive bargaining, rather than requiring a
payment by the corporation to those (few) shareholders who have been
lucky enough to properly perfect their appraisal rights? Requiring the
firm’s managers to come up with a greater amount of cash from their own
pockets would undoubtedly be a more effective deterrent than requiring a
smaller payment out of corporate funds.139
If, however, the goal of appraisal is to ensure that the gains from
risk-altering transactions exceed the losses, then requiring the corporation
to purchase the petitioning investors’ shares makes perfect sense. As
explained earlier, requiring the corporation to repurchase objectors’ shares
has the effect of forcing shareholders who otherwise gain from risk-
altering transactions to bear the net costs of compensating those who lose;
it therefore ensures that shareholder approval for risk-altering transactions
will only be forthcoming when those transactions are wealth increasing.
7. The Cash-Out Exception to the Market Out
But while the theory advanced in this Part does a good job
explaining most common features of appraisal, it does have one notable
flaw: it fails to explain the “cash-out” exception to the market out. As
should now be familiar to the reader, the market out to appraisal generally
withdraws appraisal rights from an objector whose shares are publicly
traded. But, under the “cash out” exception to the market out, appraisal
rights will ordinarily be restored if the objector is required to accept, in
exchange for his shares, anything other than shares of the surviving
corporation in a merger, shares of a publicly-traded corporation, cash in
lieu of fractional shares, or some combination of the foregoing.140 Thus, if
a merger calls for an objector’s publicly-traded shares to be converted into
cash, the “cash out” exception to the market out ensures that appraisal
rights will continue to be available.
The cash out exception to the market out cannot be explained by
the theory of appraisal rights developed in Part II.A. Under that theory,
appraisal rights are designed to deal with transactions whose affects on
shareholders differ depending on the shareholders’ preferences for risk

139
Cf. Thompson, supra note 3, at 46 (“If the plaintiff claims that individual
defendants shuffled money out of the corporation to benefit themselves and reduce the
value of the corporation, the Delaware court has said that individuals are the proper
defendants, not the corporation.”).
140
See, e.g., Del. G.C.L. § 262(b)(2). The text of the cash-out exception to the
market out is reprinted supra at note 36.

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(i.e., transactions where different shareholders attach different values to
the consideration received in exchange for their pre-transaction shares,
depending on their preferences for risk). A transaction which provides
each shareholder with an identical amount of cash per share simply does
not fall into that category, since all investors will attach the same value to
the cash received in exchange for their shares.141 Thus, assuming
shareholders have no private interests in the appraisal triggering
transaction apart from the interests as shareholders, there is no risk that the
cash-out merger could make some shareholders better off, while leaving
others worse off. Appraisal rights should therefore be denied.142
But while the theory advanced in Part II.A cannot by itself explain
the cash out exception to the market out, the theory is not undermined by
the exception. First, as Thompson notes, the cash out exception to the
market out is rare outside of Delaware.143 So any deviation from the
theory is the exception rather than the rule. And second, as the discussion
below explains, Delaware’s adoption of the cash out exception to the
market out can be readily explained, albeit on different grounds than the
rest of Delaware’s appraisal statute.
The cash out exception to the market out was added to the
Delaware General Corporation Law (along with the market out itself) in
1967. Although Ernest Folk, the Reporter for the Delaware Corporate
Law Revision Committee, does not explain the reason for the provision’s
adoption,144 its purpose becomes clear when it is read in conjunction with

141
Shareholders could, of course, have different views regarding the merits of
the transaction based on the impact of the transaction on their private interests. But the
structure of appraisal rights, particularly their focus on risk-altering transactions, shows
that appraisal rights are not designed to provide a solution to the problem of conflicting
private interests of shareholders.
142
That appraisal statutes, like Delaware’s, were originally adopted without
exceptions for cash out transactions in no way undermines the theory of appraisal set
forth in Part II.A. When appraisal statues first appeared in the late nineteenth century,
cash out transactions were generally prohibited, see Thompson, supra note 3, at 19 (citing
Carney, supra note 57, at 97), except in connection with dissolutions where, as noted
earlier, appraisal rights were typically denied, see supra note 118 and accompanying text.
So there was little reason to include general exceptions covering cash-outs in early
appraisal statutes.
143
Thompson, supra note 3, at 30. See, e.g., Ind. Code § 23-1-22—8 (1997);
Or. Rev. Stat. § 50.544 (1997).
144
The cash-out exception to the market out is not even mentioned in Folk’s
report to the committee. See Ernest L. Folk, Report on Delaware Corporation Law 196-
202 (1968) (discussing appraisal without considering a “cash-out” exception to the

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(1) the Delaware Supreme Court’s 1962 decision in Stauffer v. Standard
Brands, Inc.145 and (2) the 1967 modifications to Del. G.C.L. §251, the
Delaware provision governing long-form mergers.146 In Stauffer, a
minority shareholder challenged a short-form, cash-out merger completed
under Del. G.C.L. §253 on the grounds that the cash provided to minority
shareholders -- $105 per share – was so grossly inadequate as to constitute
constructive fraud. The Delaware Supreme Court, however, rejected the
challenge, holding that in the circumstances of the case the appraisal
remedy was exclusive because, where “the real relief sought is the
recovery of the monetary value of the plaintiff’s shares[,] . . . the statutory
appraisal provision provide[s] an adequate remedy.”147 In reaching this
result, the Court did not anticipate (and therefore did not answer) the many
challenges to the adequacy of appraisal as a remedy for majority
misconduct;148 instead, the Court simply adopted the opinion of the Vice
Chancellor, which emphasized the differences in the statutory language of
Del. G.C.L. §251, the long-form merger provision, and Del. G.C.L. §253,
the short-form merger provision.149 Delaware G.C.L. §251, the Vice
Chancellor noted, did not (at the time) authorize “majority stockholder[s] .
. . [to] eliminate minority stockholders as participants in the continuing
enterprise [by the payment of cash].”150 So minority shareholders had to
be provided with a remedy other than appraisal in order to prevent
objecting minority shareholders from being forced to accept cash for their

market out). Folk did, however, explain the operation of the cash-out exception to the
market out in the first edition of his treatise on Delaware corporation law. See Ernest L.
Folk, The Delaware General Corporation Law: A Commentary and Analysis (1972).
145
187 A.2d 78 (Del. 1962).
146
A long-form merger is one that is completed by taking all the steps specified
in Del. G.C.L. §251, including obtaining the approval of the directors and shareholders of
each merging corporation; a short-form merger, on the other, refers to a merger between
a parent and a subsidiary (at least 90% of the stock of which is owned by the parent),
which is completed following the abbreviated procedures specified in Del. G.C.L. §253.
147
187 A.2d at 80. Delaware had amended its short-form merger provision to
allow the use of cash in 1957. See Elliott J. Weiss, The Law of Take Out Mergers: A
Historical Perspective, 56 N.Y.U. L. Rev. 624, 648 (1981). However, when the
Delaware legislature made this change, it did not alter the appraisal statute to except the
newly-authorized as cash-out merger. Had it done so, the issue in Stauffer would never
have arisen.
148
See, e.g., notes 40-44 and accompanying text.
149
Id.
150
Stauffer v. Standard Brands Inc., 178 A.2d 311, 314 (Del. Ch. 1962).

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shares. By contrast, Delaware G.C.L. §253 expressly provided for the
payment of cash in short-form mergers. Accordingly, restricting
dissenting shareholders in short-form mergers to appraisal (i.e., forcing
objecting shareholders to accept cash for their shares) did not risk a result
not contemplated by the legislature.
Stauffer was a great victory for majority shareholders in short
form, cash out mergers under Del. G.C.L. §253. As a result of Stauffer,
majority shareholders in such mergers would no longer have to defend
themselves in breach of fiduciary duty actions brought on behalf of all the
firm’s minority shareholders; instead, majority shareholders in short-form,
cash-out mergers would only have to defend themselves in appraisal
proceedings brought on behalf of the relatively few minority shareholder
who would successfully perfect their appraisal rights. Thus, it should not
be surprising that when the corporate bar sought an expansion of Del.
G.C.L. §251 in 1967 to authorize long-form, cash out mergers,”151 the
corporate bar also sought to ensure that minority shareholders challenging
those mergers would be restricted to an appraisal remedy.152 This goal, of
course, could only be achieved if minority shareholders in long-form,
cash-out mergers under Del. G.C.L. §251 had access to the appraisal
remedy, a result that the cash-out exception to the market out ensured.153

151
The expansion of Del. G.C.L. §251 to allow the payment of cash in exchange
for the shares of a constituent corporation in a mergers was proposed by McCutchen,
Doyle, Brown, Trautman & Emersen of San Francisco. See Report on the Delaware
Corporation Law 195-D (1968).
152
This result may have been consistent with the interests of shareholders if the
cost to the firm of the existing fiduciary duty check on mergers exceeded the benefits.
Cf. Ralph K. Winter Jr., State Law, Shareholder Protection, and the Theory of the
Corporation, 6 J. Leg. Stud. 251 (1977) (arguing that state chartering of corporations
leads to a “race for the top” in corporate law, as states compete with one another to
provide managers with the ability to raise capital at the lowest possible cost). Or the
result might simply have advanced the private interests of corporate managers. Cf.
Geoffrey P. Miller & Jonathan R. Macey, Toward an Interest Group Theory of Delaware
Corporate Law, 65 Tex. L. Rev. 469 (1987) (using interest group theory to show that
state competition for corporate charters will sometimes produce laws that conflict with
shareholder interests).
153
This understanding of the cash-out exception to the market out is consistent
with the refusal of the 1967 Delaware Legislature to extend the market out to short-form
mergers under Del. G.C.L. §253, even though Folk apparently recommended that course
of action, see Ernest L. Folk, Report on Delaware Corporation Law 193 (1968). The
refusal to apply the market out to short-form mergers ensured that appraisal would
continue to be the minority’s exclusive remedy under Stauffer when the majority used
Del. G.C.L. §253 to effect a cash out.

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 The proponents of the cash-out exception to the market out got
their wish in 1971 when the Delaware Chancery Court extended the
Stauffer appraisal-exclusivity rule to long-form mergers,154 though that
victory proved to be short-lived.155 Thus, although the cash-out exception
to the market out appears, at first, to undermine the theory of appraisal set
forth in Part II.A., it’s adoption in Delaware can be readily explained.156
C. Consistency of Theory with History
The theory of appraisal discussed above is also consistent with
much of the history of the remedy. As noted earlier, appraisal statutes
have long been defended as necessary to protect shareholders from being
forced to invest in fundamentally altered or, in effect, new firms against
their will. For example, as Thompson notes, a 1902 treatise explained
appraisal rights as necessary “to give [the minority shareholder] the
privilege of selling out instead of embarking in the new enterprise.”157
The theory discussed in Part II.A above explains why shareholders might
benefit if the majority’s power to force the corporation to “embark[] on a
new enterprise” is limited by appraisal rights, particularly in circumstances
where capital markets are not well developed; it therefore has the virtue of
being consistent with the early justifications of the remedy.

154
See David J. Greene & Co. v. Schenley Industries, Inc., 281 A.2d 30 (Del.
Ch. 1971).
155
See Singer v. Magnovox Co., 380 A.2d 969, 980 (Del. 1977) (holding that
the courts “will scrutinize the circumstances [of a cash-out merger under §251] for
compliance with the Sterling rule of “entire fairness” and, if it finds a violation thereof,
will grant such relief as equity may require;” the court then concluded that “[a]ny
statement in Stauffer inconsistent herewith is held inapplicable to a §251 merger”); see
also Roland International Corp. v. Najjar, 407 A.2d 1032 (Del. 1979) (extending Singer
to short-form mergers under Del. G.C.L. §253). But see Weinberger v. UOP, Inc., 457 A.
2d 701, 714 (Del. 1983) (holding that “a plaintiff’s monetary remedy ordinarily should
be confined to the more liberalized appraisal proceeding herein established”) (emphasis
added).
156
Others view the cash-out exception to the market out as motivated by
Fischel’s concern about majority oppression of the minority – that is, as insuring that
shareholders will have access to an appraisal remedy in cash-out mergers where the
danger of majority misconduct is greatest. See Thompson, supra note 3, at 30; see also
Fischel, supra note 12, at 885. But this view ignores the fact that the original effect of
the cash out exception to the market out was to restrict minority shareholders in cash-out
mergers to a less effective remedy.
157
Thompson, supra note 3, at 18-19 n.57 (quoting Walter C. Noyes, A Treatise
on the Law of Intercorporate Relations §51, at 84 (1902)).

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 In addition, the theory of appraisal discussed above is consistent
with the timing of the adoption of appraisal statutes. Prior to the adoption
of the first appraisal statutes in the late 19th century, shareholders could be
assured that risk-altering transactions would not impose net losses on
shareholders because, under 19th century doctrine, shareholders were
viewed as having “vested rights” which prevented firms from effecting
fundamental changes without the consent of each and every
shareholder.158 Such transactions could therefore only go forward if all
shareholders were made better off (and therefore consented to the
transaction) or if winners adequately compensated losers. But the vested
rights approach to deterring value-decreasing transactions became
increasingly costly in the late 19th century as increases in the numbers of
shareholders in firms made bargaining with hold-outs more difficult159 and
as technological advances made risk-altering transactions like mergers
more desirable.160 As a result, courts and legislatures began to alter the
law, first with respect to railroad corporations and then with respect to
private corporations generally, to authorize corporations to effect risk-
altering transactions such as mergers without obtaining unanimous
shareholder consent.161 As Thompson shows,162 the adoption of appraisal
statutes generally followed closely on the abandonment of the unanimity
rule, a result which makes perfect sense if, as is argued here, appraisal
rights serve the same purpose as a shareholder veto: ensuring that the
gains from risk-altering transactions exceed the losses.163

158
See Carney, supra note 57, at 79-81.
159
See Thompson, supra note 3, at 12 (noting that, “[t]hroughout the 1880s,
most manufacturing firms were family owned or otherwise closely held”) (citing Herbert
Hovenkamp, Enterprise and American Law, 1836-1937, at 253 (1991); see also Morton J.
Horwitz, Santa Clara Revisited: The Development of Corporate Theory, 88 W. Va. L.
Rev. 173, 209, 210 (stating that railroads constituted the only group of large, publicly
held companies prior to 1890).
160
See Carney, supra note 57, at 79.
161
Id. at 79-97.
162
Thompson, supra note 3, at 14-15.
163
Cf. Voeller v. Neilston Co., 311 U.S. 531, 535 n .6 (1941) (explaining the lag
between the abandonment of the unanimity rule and the adoption of appraisal rights as
follows: “Unanimous shareholder consent was a prerequisite to fundamental changes . . .
. To meet the situation, legislatures authorized . . . changes by majority vote. This,
however, opened the door to victimization of the minority. To solve the dilemma,
statutes permitting a dissenting minority to recover the appraised value of its shares were
widely adopted.”)

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 Finally, as the earlier discussion of the market out explains, the
theory of appraisal set forth in Part II.A explains, at least in part, the
evolution of the appraisal remedy over time. In particular, the theory
explains the emergence of the appraisal right without a market out in the
late 19th century, the introduction of the market out in the 1960s, and the
continued expansion of the market out over the last forty years.164
By contrast, the theories of other commentators are quite difficult
to reconcile with the history of appraisal. Fischel, for instance, focuses on
the ability of appraisal rights to police situations where wealth
appropriation is more likely than wealth maximization, such as “when
shareholders of one firm attempt to exploit the coordination problems of
shareholders of another firm” by making a coercive, two-tiered tender
offer, or when a majority shareholder attempts to “confiscate the pro rata
share of the minority in a freeze-out merger.”165 But two-tiered, coercive
tender offers were unknown in the late 19th century when appraisal rights
first appeared and, as Thompson points out, “[19th century] limits on
corporate authority and the judicial use of fiduciary duty to check self-
dealing [greatly] restricted the majority’s ability to implement [freeze-out]
transaction[s].”166 Accordingly, that appraisal was originally designed as
a check on two-tiered tenders offers and minority freeze-outs seems
doubtful.
Indeed, of the principal commentators criticizing the traditional
justification for appraisal, only Manning attempts to explain why appraisal
rights emerged in the late 19th century after the unanimity rule for
fundamental change was abandoned.167 Manning suggests that “early
appraisal statutes [may have been] promoted by perspicacious legislative
agents of management, who saw in these statutes a way to consolidate and
liberate their own condition” – that is, as a way to entice courts and
legislatures “to soften the rigor of the [traditional] judicial rule which
protected the shareholder by requiring unanimous shareholder approval

164
See supra Part II.B.2.
165
See supra Part I.A.
166
Thompson, supra note 3, at 19 (citing Carney, supra note 57, at 97).
167
Most commentators do not greatly concern themselves with the history of
appraisal, or with reconciling their explanations of appraisal with traditional views of the
remedy. Instead, most commentators “have preferred to rebuild from first principles and
to ask why appraisal has survived in an evolving world and under what circumstances
parties would bargain for it.” Kanda & Levmore, supra note 13, at 431. Fischel, Kanda
and Levmore, and Gilson all arguably fall into this camp.

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[for fundamental corporate changes].”168 Manning further suggests that
such enticement was necessary because of the 19th century view that
corporations were things that lived and died, rather than mere forms of
organization.169 He therefore concludes that courts and legislatures may
not have permitted the abandonment of the unanimity rule for legal
traumas, like mergers (which involve the death of a corporation), “serious”
charter amendments, and sales of substantially all the firm’s assets,
without substituting some alternative form of protection such as the
appraisal remedy.170
But Manning’s historical explanation for the emergence of
appraisal rights has two principal flaws. First, since it views appraisal
statutes as part of an effort to escape the rigors of the traditional unanimity
rule, the theory suggests that appraisal statutes should generally have been
adopted in tandem with statutes authorizing corporations to undertake
mergers by less than a unanimous vote. The evidence, however, shows
that there was often a significant time lag between the adoption the two
provisions, particularly with the earliest appraisal statutes.171 Second,
Manning’s theory suggests that appraisal rights should have been extended
to all corporate transactions that could be characterized as involving legal
traumas for shareholders. But, as Manning himself acknowledges, this
never happened: “If it is serious surgery to change any part of the
‘corporation,’ it is much more serious to bring about its ‘death’ by
dissolution. By this logic, one might expect to find the appraisal remedy
available to the shareholder dissenting from dissolution. In fact, however,
no statute provides for it.”172
III. The Future of Appraisal

168
Manning, supra note 5, at 228-29.
169
Id. at 244-46.
170
Id. at 246-47.
171
See Thompson, supra note 3, at 14 (“Appraisal statutes are often presented as
having been enacted in tandem with statutes authorizing consolidation or merger by less
than unanimous vote, but there was a significant difference in the spread of the two
statutes. By the turn of the century, a dozen states had statutes authorizing consolidation
for corporations generally, but only five of those states had appraisal statutes.”).
172
Manning, supra note 5, at 250 (emphasis added). By contrast, the theory set
forth in Part II.A above is consistent with the denial of appraisal rights in connection with
dissolutions. See supra Part II.B.1.

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 If, as Part II argues, the purpose of appraisal is to ensure that the
gains from risk-altering transactions exceed the losses, how -- if at all ---
should modern appraisal statutes be reformed? This Part considers this
question by focusing on Professor Thompson’s 1995 study of the appraisal
remedy, Exit, Liquidity, and Majority Rule: Appraisal’s Role in Corporate
Law. 173
Thompson’s article makes a number of important contributions to
the study of appraisal remedy, including, among other things, a
comprehensive analysis of the cases to determine the function of appraisal
in the modern era. Thompson identified all reported cases involving
appraisal rights for the ten-year period following the Delaware Supreme
Court’s decision in Weinberger v. UOP, Inc.,174 the decision which
ushered in the modern era of appraisal rights by substantially overhauling
appraisal proceedings in Delaware. Thompson then categorized the
transactions involved in those cases to determine the context in which
appraisal most frequently appears. This analysis revealed: (1) that, of the
eighty identified transactions, eighty percent involved cash-outs; (2) that
“the most frequently recurring context [for appraisal] . . . was that of a
majority shareholder in a widely traded corporation seeking to force out
the minority shareholders;” and (3) that, “[i]n addition, there was a
significant number of cases in which a third party took over the
corporation with a cash-out as the second step of an acquisition of control
from dispersed shareholders.”175 Thompson inferred from this that
Fischel’s explanation of appraisal -- “as an implied contractual term that
sets the minimum price at which the firm . . . can be sold in situations
where certain groups are more likely to attempt to appropriate wealth from
other groups than to maximize the value of the firm”176 -- best described
the modern use of the remedy.177
This conclusion led Thompson to endorse a number of popular
reforms designed to ensure that appraisal serves as an effective “check
against opportunism by a majority shareholder in . . . transactions [where]

173
See supra note 3.
174
457 A.2d 701 (Del. 1983).
175
Thompson, supra note 3, at 25-26.
176
Fischel, supra note 12, at 876.
177
Thompson, supra note 3, at 26-27.

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. . . the majority forces minority shareholders . . . to accept cash for their
shares.”178 These reforms include the following:
1. Eliminating the Market Out.179 Thompson suggests
eliminating, or at least limiting the expansion of, the market out.
He argues that the market out is inconsistent with the goal of
checking opportunism by majority shareholders because “the price
in an efficient market will provide no compensation for self-
dealing.”180 Thompson explains that, “if those in control of a
corporation propose a transaction that is bad for the corporation but
good for the other transacting entity in which the controllers have a
larger interest, the market’s reaction will send the price of the
corporation’s shares lower, giving no protection against self-
serving behavior.” 181
2. Altering Valuation Rules to Include Gains Attributable to
the Triggering Transaction. Thompson acknowledges that “[m]ost
states define fair value available in appraisal to exclude any
appreciation or depreciation attributable to the [appraisal-
triggering] transaction.”182 This rule, he suggests, made sense in
traditional appraisal cases where the dissenter was given the option
of continuing in the “new” enterprise, but chose not to.183 But,
Thompson argues, such a valuation rule has no place in the vast
majority of modern appraisal cases which involve cash-outs. He
reasons that, “[i]f . . . the minority . . . is being forced out [in a
cash-out transaction], perhaps because of an anticipated increase in
value that will only become visible after the transaction, exclusion

178
Id. at 4.
179
Id. at 28-31.
180
Id. at 29.
181
Id. at 30 (citing Fischel, supra note 12, at 885). If, however, a state should
choose to retain a market out, Thompson suggests restricting the market out by adopting
a Delaware-like cash-out exception to the market out. Id. at 30. In addition, Thompson
argues against expanding the market out to include NASDAQ stocks. Id. at 30-31. Other
commentators share Thompson’s conviction that the market out should be eliminated, at
least in cases of transactions put forward by majority shareholders. See, e.g., Eisenberg,
supra note 11, at §7.3; Mary Siegel, Back to the Future: Appraisal Rights in the Twenty-
First Century, 32 Harv. J. on Legis. 79, 124-26 (1995).
182
Thompson, supra note 3, at 35-36.
183
Id. at 36.

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 [of gains attributable to the transaction for an appraisal award] can
easily become a basis for oppression of the minority.”184
3. Reforming Perfection Procedures. As noted above, state
appraisal statutes typically require the shareholder seeking
appraisal to notify the corporation of that desire before the
triggering transaction, to vote no or abstain from voting when the
transaction is presented to the shareholders, and to file a petition
requesting appraisal shortly after the triggering transaction is
completed.185 Thompson argues that these procedures are “ill-
suited” to appraisal in the modern era because they “are a burden
to full recovery when the majority has decided to eliminate an
entire group of shareholders, and there is a common question about
whether the price is fair.”186 He therefore suggests streamlining
the traditional perfection rules to facilitate shareholder access to
the remedy.187
4. Making the Appraisal Remedy Exclusive. Generally, those
who view appraisal as a device to check misconduct by majority
shareholders favor making the appraisal remedy exclusive, at least
so long as the procedural problems that inhibit shareholder access
to the remedy are eliminated.188 They argue that, by ensuring that
the majority pays a fair price for the minority’s shares, appraisal by
itself functions as an adequate check on majority misconduct.
Thompson, for the most part, agrees with this view. He writes that

184
Id. Several other commentators agree that the traditional valuation rules
preclude appraisal from functioning as an effective check on majority misconduct. See,
e.g., Vorenberg, supra note 44, at 1201-04; Brudney & Chirelstein, supra note 44, at 304-
07. Fischel, however, argues that the traditional rules, focusing on pre-transaction values,
should be retained because gain-sharing rules threaten to stifle value-increasing corporate
transactions. See Fischel, supra note 12, at 886; see also Easterbrook & Fischel, supra
note 44, at 709.
185
See supra note 41 and accompanying text.
186
Thompson, supra note 3, at 41. For an explanation of how these perfection
rules burden full recovery by the minority, see supra notes 41-44 and accompanying text.
187
Thompson, supra note 3, at 41. Among other things, Thompson recommends
the adoption of rules to facilitate appraisal class actions and the rejection of judicial
decisions that interpret procedural rules strictly to, for instance, require the dismissal of
an appraisal action when notices arrive “minutes or hours after the appointed time.” Id.
at 40. The call for simplified appraisal perfection procedures goes back more than 30
years. See, e.g., Manning, supra note 5, at 260-62.
188
See, e.g., Fischel, supra note 12, at 901-02.

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 “[t]here is no inherent reason why valuation could not emerge as a
preferred response to monitoring conflict transactions,” like cash-
out mergers, that are the focus of modern appraisal proceedings.189
But he notes that “[i]t is surprising that courts are willing to permit
appraisal as the sole check on conflict when the remedy, as it
currently exists, imposes so many procedural steps on plaintiffs
and uses promajority valuation standards.”190
Thompson acknowledges that the reforms he suggests might not fit with
the original purpose of appraisal,191 which he identifies as providing
liquidity to the frozen-in shareholder after certain fundamental changes.192
But he finds this objection to reform unpersuasive because “[r]equiring
appraisal to perform two quite different functions” might cause appraisal
to perform its more important, and “theoretically more defensible,”193 job
of policing conflicts “poorly.”194
The analysis in this paper, however, suggests that these proposals
for reform should be rejected. First, the proposals are based on a flawed
view of the purpose of appraisal rights as a check against opportunism by
majority shareholders in transactions where the majority forces the
minority to accept cash for their shares. As the analysis in the preceding
Parts explains, this view of appraisal does not square with the history of
the remedy,195 nor can it explain the basic features of appraisal.196

189
Thompson, supra note 3, at 45.
190
Id. at 46 (emphasis added). As noted above, Fischel would differ with
Thompson’s criticism of the valuation standards typically used in appraisal proceedings.
See supra note 184.
191
See, e.g., Thompson, supra note 3, at 28.
192
Id. at 4. Thompson’s view that the original purpose of appraisal was to
provide liquidity to the frozen-in shareholder after certain fundamental changes is
consistent with the view of appraisal advanced in this paper. But the liquidity theory of
appraisal is incomplete. Among other things, it fails to explain why liquidity should be
provided in such cases; it therefore provides no theoretical basis for determining such
matters as (1) the types of corporate transactions that should trigger appraisal rights, (2)
the applicable standards of valuation, and (3) whether the appraisal remedy should be
exclusive.
193
Id.
194
Id. at 34.
195
See supra notes 165-166 and accompanying text.
196
See supra Part I.A.

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Furthermore, as the discussion in Part I makes clear,197 a majority-
checking purpose for appraisal is unnecessary given the existence of
breach of fiduciary duty actions that require majority shareholders to carry
the burden of establishing the fairness of challenged transactions to
minority shareholders: these actions serve the same function that
Thompson and others assign to appraisal rights, but do so more effectively
because, among other reasons, they lack the features (e.g., cumbersome
perfection procedures and market outs) that often make appraisal rights
difficult or impossible to exercise. True, a number of states, including
Delaware, have undercut the fiduciary-duty check on majority misconduct
by (mistakenly) providing that appraisal should ordinarily be the exclusive
remedy in cases like cash-out mergers.198 But the solution to this mistake
is not to transform the appraisal remedy into a breach of fiduciary duty
action (as the proposals above suggest), but rather is to simply repeal the
appraisal-exclusivity rule that has forced upon appraisal a function it is ill-
suited to perform.
Second, and perhaps more importantly, the reform proposals
discussed above are inconsistent with the purpose of appraisal outlined in
Part II.A. For instance, eliminating the market out will result in the
application of appraisal rights in situations where the benefits from
appraisal are small in comparison to the costs.199 Similarly, altering the
traditional valuation rules and reforming appraisal perfection procedures
could impair the effectiveness of appraisal as a check on value-decreasing,
risk-altering transactions for the reasons explored in Parts II.B.3 and 6
above. So while adopting the proposals discussed above may make
appraisal a more effective check on majority misconduct, it will at the
same time make appraisal a less effective check on risk-altering
transactions that make shareholders as a group worse off. Thompson
suggests that this trade off is worth making because the number of cases
where appraisal functions as a check on majority misconduct greatly
exceeds the number of cases where appraisal rights perform their
traditional function of checking value-decreasing, risk-altering
transactions. But the choice between checking majority misconduct, on

197
See supra text accompanying notes 39-44.
198
This explains why so many of the modern appraisal cases involve minority
cash-outs, even though minority shareholders would clearly prefer to bring a
shareholders’ derivative suit alleging breach of fiduciary duty. For a discussion of why
the appraisal remedy should not be exclusive, see supra Part II.B.5.
199
See supra Part II.B.2 and notes 104-113 and accompanying text.

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the one hand, and value-decreasing, risk-altering transactions, on the
other, is a false one: if appraisal exclusivity is rejected (so that
shareholders remain free to challenge conflict of interest transactions like
cash-out mergers on fiduciary duty grounds), we can achieve both
objectives at the same time.
The analysis in this paper thus suggests a very different approach
to reform to that taken by Thompson and others. The principal
components of that approach include the following:
1. Retaining and Expanding the Market Out. Instead of
eliminating or restricting the market out, as Thompson and others
suggest, the market out should (subject to the one caveat noted
below) be retained and expanded as securities markets more
closely approach perfection. As the analysis in Part II suggests,
when securities markets more closely approach perfection, the
gains from appraisal become small in comparison to the costs.
This suggests a market out for widely-traded shares, such as those
traded on the national securities exchanges and those held of
record by a sufficient number of holders to produce an active
trading market. It also suggests extending the market out to the
principal over-the-counter markets (such as the NASDAQ Stock
Market) as those markets become more efficient. There is,
however, one caveat to this analysis: while the fact that a share
trades in a well-developed securities market generally equates with
effective shareholder access to capital markets, that will not always
be the case. For instance, shareholders holding large blocks of
stock may be effectively precluded from selling their stakes by the
size of their holding, while insiders and others holding “restricted
stock” may be precluded from selling all, or at least some, of their
shares by the federal securities laws. The analysis in Part II
suggests that, for such shareholders, the desirability of a risk-
altering transaction will depend on their personal preferences for
risk. Accordingly, when shareholders hold widely traded stock,
but are effectively precluded from selling that stock by either the
size of their holdings or the federal securities laws, appraisal rights
should be restored.
2. Eliminating the Cash-Out Exception to the Market Out.
The cash out exception to the market out, introduced in Delaware
in 1967, should be replaced with a general provision making
appraisal rights unavailable whenever the consideration offered to
shareholders takes the form of cash. As explained earlier, the

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 value of cash in no way depends on an individual investor’s
personal taste for risk, so the value of the consideration received in
a cash-out transaction will not vary from investor to investor.
Accordingly, under the theory set forth in Part II.A, appraisal has
no role to play.200 As Thompson’s analysis makes clear, excluding
cash-out transactions from appraisal will, of course, dramatically
reduce the number of future appraisal cases.201 But the success of
a remedy should not be measured by the number of times it is
implemented, but rather by how well it achieves its objectives.
3. Rejecting Valuation Rules that Include Gains
Attributable to the Triggering Transaction; Applying Minority
Discounts; Rejecting Discounts for Illiquidity. Traditional
valuation rules requiring shareholders who elect appraisal to accept
the pre-transaction value of their shares should be retained (or, for
those jurisdictions that have departed from the traditional standard,
restored). For the reasons explained in Part II.B.3, standards of
valuations which give objectors more than the pre-transaction
value of their shares can inhibit value-increasing transactions. In
addition, the “fair value” of a firm’s shares, for appraisal purposes,
should be computed by discounting the firm’s value to reflect an
objecting shareholder’s minority interest. This is because the
purpose of appraisal is fully served by putting objecting
shareholders in the positions they would have occupied had the
triggering transaction not taken place. Giving minority
shareholders the value of a minority interest accomplishes this
objective.202 At the same time, a discount for illiquidity is

200
For a discussion of why appraisal statutes were originally adopted without a
general exception for cash out transactions, see supra note 147.
201
See supra note 175 and accompanying text (noting that 80% of reported
appraisal cases since 1984 involve cash-out transactions).
202
Thompson endorses the opposite view, reasoning that: “Only . . . [by
excluding a discount] can minority stockholders be assured that insiders in control of a
company, burdened by conflicting interests, may not purchase the enterprise at a price
less than that obtainable in the marketplace of qualified buyers and avoid paying a full
and fair price to the minority.” Thompson, supra note 3, at 39 (quoting BNE Mass. Corp.
v. Sims, 588 N.E.2d 14, 19 (Mass. App. Ct. 1992)). This quotation, however, does not
answer the argument that a majority shareholder should pay less than a third party
because the majority shareholder, unlike a third party, has already purchased control. Cf.
Mendel v. Carroll, 651 A.2d 297, 304-05 (Del. Ch. 1994) (holding that a cash out
proposal by a controlling shareholder is fundamentally different than a merger proposal
from an unaffiliated third party because the “[controlling shareholder] already in fact had

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 inconsistent with the purposes of appraisal: as the discussion in
Part II.A makes clear, the purpose of appraisal is to shift the costs
of accessing capital markets from objecting shareholders to the
firm, so forcing objecting shareholders to bear these costs by
applying an illiquidity discount to the pre-transaction value of their
shares plainly conflicts with the remedy.
4. Rejecting Appraisal-Exclusivity and Retaining Basic
Perfection Procedures. Finally, for the reasons discussed in Parts
II.B.5 and 6, the availability of an appraisal action should not
preclude an action for breach of fiduciary duty in connection with
the same transaction; and basic procedures, like pre-vote
notification of an intention to seek appraisal and the requirement
that objectors vote “no” or abstain from voting on the triggering
transaction, should be retained.
Conclusion
Commentators have long sought to articulate a meaningful
economic function for appraisal. For the most part, however, these efforts
have fallen short. This paper sets forth a new theory of appraisal which
focuses on the ability of appraisal rights to decrease the probability of risk-
altering transactions that result in net losses to shareholders. Unlike
previous efforts to explain appraisal, this theory explains both the basic
features of the remedy and the evolution of the remedy over time,
particularly the introduction and expansion of the market out. It also
suggests a very different future for appraisal than competing theories --
one which includes, among other things, the continued expansion of the
market out, the rejection of appraisal exclusivity, and the elimination of
the cash-out exception to the market out.

a committed block of controlling stock;” thus, the court concluded, “[i]t is . . . quite
possible that the [controlling shareholders] $24.75 [offer] may have been fair, even
generous, while the $27.80 [third party offer] may be inadequate”). Despite this
argument, a majority of courts hold that it would be inappropriate to apply a minority
discount. See Thompson, supra note 3, at 38.

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