October 29, 2018

LLCs: Contracting for Appraisal Rights

Most state LLC statutes do not expressly provide for appraisal rights, but many permit these entities to provide those rights in their operating agreements. This recent blog from Lowenstein Sandler’s Steve Hecht & Rich Bodnar discusses the ability of minority LLC investors to obtain appraisal rights by contract – and this excerpt lays out some of the reasons why they might want to consider that approach:

Many states, including New York, allow the members of an LLC–as an example–to include appraisal rights in the operating agreement. While we often cover appraisal on this blog as a statutory remedy focused on shareholder protection, negotiated appraisal rights can be a part of a corporate lawyer’s suggestion box in trying to get a deal done. A minority investor concerned about his or her minority status may be comforted by an appraisal rights mechanism in the foundational documents. Similarly, an investor who is contemplating a minority investment may wish to negotiate for an appraisal provision precisely because it can give an “out”–and, at minimum, bargaining power–if the minority investor sees issues with an otherwise-aboveboard merger.

The blog notes that a minority investor may be willing to do some horse-trading to obtain these rights at the time of its investment. For example, it may be willing to give up the right to seek to enjoin a potential transaction in exchange for a viable post-closing remedy such as a contractual appraisal right.

John Jenkins