United States: Appraisal Rights In Maryland

Last Updated: May 23 2017
Article by Scott R. Wilson and Vivian Duker

With the recent focus on appraisal rights in the Delaware Court of Chancery, it was only a matter of time before a Maryland court took up the issue. Although originally authored in April 2016, the Circuit Court for Baltimore City recently published its decision in Mark G. Egan, et al. vs. First Opportunity Fund, Inc. et al., Case No. 24-C-14-008132 (Cir. Ct. Balt. City April 22, 2016) construing a dissenting stockholder's demand for fair value under Maryland law. The resulting non-precedential opinion, if followed by other Maryland courts, further limits the availability of appraisal rights to stockholders of Maryland corporations.


Under Maryland law, rights of an objecting stockholder in a Maryland corporation (known as "appraisal rights" or "dissenter's rights" in other jurisdictions) are governed by Section 3-202 of the Maryland General Corporation Law ("MGCL"). Stockholders of a Maryland corporation may demand fair value and perfect appraisal rights (i.e. object and receive payment of the fair value of their stock) in the event of (1) a merger, share exchange or the sale of all or substantially all the assets of the corporation, (2) an amendment to the charter that alters the contract rights, as expressly set forth in the charter, of outstanding stock unless the right to do so is reserved in the charter, or (3) in the case of certain business combination governed by Title 3 Subtitle 6 of the MGCL. Importantly, however, Section 3-202(c) provides a number of exceptions where a dissenting stockholder has no such right.

Most prominently, the statute provides for a "market-out" exception applicable to a corporation's stockholders with a class or series of stock that is listed on a national exchange. MGCL § 3 202(c)(1). Under this exception, attendant to a merger, share exchange or the sale of all or substantially all of the assets of the corporation, a stockholder of a Maryland corporation may not demand fair value if the stock is listed on a national securities exchange. The policy justification for the market-out exception is that a liquid, highly efficient market will always reflect fair value of stock prior to closing of the subject transaction. Consistent with the Model Business Corporation Act, the Maryland market-out exception is not limited to stock-for-stock transactions and includes even going-private, cash-out transactions. The only limitation on the market-out exception is found in Section 3-202(d) of the MGCL, which eliminates the market-out exception for management led buyouts where management holds 5% or more of the outstanding voting stock and management's stock will be treated differently than that held by other holders of voting stock. This limitation on the market-out exception is somewhat analogous to Section 13.02(b)(4) of the Model Business Corporation Act, which carves out "interested transactions" from its version of appraisal rights.

Also, and more potent than the market-out exception and unique to Maryland, the charter of a Maryland corporation may eliminate appraisal rights entirely. MGCL §3-202(c)(4). The charter exception may eliminate appraisal rights even in a management led buyout that would otherwise implicate Section 3-202(d). While Section 13.02(c) of the Model Business Corporation Act permits corporations to eliminate in their charters appraisal rights for a class or series of preferred stock (on certain conditions), the Model Act and the Delaware General Corporation Law do not otherwise have the broad charter opt-out exception to statutory appraisal rights permitted by the Maryland statute. As evidenced by Mark G. Egan, et al. vs. First Opportunity Fund, Inc. et al., Case No. 24-C-14-008132 (Cir. Ct. Balt. City April 22, 2016), this is ultimately important.

The First Opportunity Fund Case

In Egan, the dispute between First Opportunity Fund, Inc., a registered closed-end investment fund formed as a Maryland corporation ("FOF"), and two of its stockholders, Mark G. Egan and Private Investment Fund, LP (collectively, "Plaintiffs"), arose from the sale of all or substantially all the assets of FOF (and two other funds managed by affiliated advisors) to Boulder Growth & Income Fund, Inc. ("BIF"). Because FOF stock was not listed on a national exchange, the market-out exception did not apply to the transaction and, absent the actions described below, appraisal rights would have been available to FOF stockholders.

To eliminate appraisal rights, prior to submitting the transaction to the stockholders for their consideration, the board of directors of FOF proposed that the charter of FOF be amended to include the following ("Proposal 1"):

Holders of shares of the Corporation's stock shall not be entitled to exercise any rights of an objecting shareholder [sic] provided for under Title 3, Subtitle 2 of the Maryland General Corporation Law or any successor statute in connection with a reorganization of the Corporation with another investment company or a family of investment companies having the same investment advisor or administrator as the Corporation.

If approved, Proposal 1 purported to amend the FOF charter to divest stockholders of any appraisal rights as permitted by Section 3-202(a)(4) of the MGCL (but only as it related to the consolidation of the funds). As disclosed in the proxy statement, if Proposal 1 was approved, the stockholders meeting would be temporarily adjourned and FOF would file articles of amendment to amend the charter. If Proposal 1 was not approved, the proposal to consider the consolidation would not be considered. At the stockholders meeting, Proposal 1 was approved, the meeting adjourned and articles of amendment were accepted for record by the State Department of Assessments and Taxation. The meeting then resumed and the transfer of assets from FOF to BIF was approved by the FOF stockholders. Following these actions, Plaintiffs submitted a written demand for the fair value and otherwise complied with the statutory requirements for perfecting appraisal rights under the MGCL. FOF and BIF denied the demand and litigation ensued.

In Count I of the resulting complaint, Plaintiffs demanded fair value of their stock pursuant to Section 3-202(a)(1) based on the transfer of all of FOF's assets. They alleged that the charter amendment to eliminate appraisal rights and the approval of the asset sale were not independent transactions and, therefore, rights of an objecting stockholder (appraisal rights) were available. In Count II, in the alternative, Plaintiffs demanded fair value of their stock pursuant to 3-202(a)(4) based upon the charter amendment eliminating appraisal rights, which Plaintiffs argued implicated a "contract right."

In response, FOF argued that (i) the charter amendment and the asset transaction were independent transactions such that once the amendment became effective, the right to appraisal rights was eliminated pursuant to Section 3-202(c)(4) of the MGCL; and (ii) the amendment of the charter did not implicate Section 3-202(a)(4), pertaining to when appraisal rights are available attendant to charter amendments, because appraisal rights are conveyed by statute and are not "contract rights."

The court considered Count II first, Plaintiffs' argument that the charter amendment triggered appraisal rights under Section 3-202(a)(4) because the amendment altered the contract rights of Plaintiffs' stock. By way of background, it is common for Maryland corporations to include in their charters a clear reservation allowing amendments to the charter that alter the contract rights of outstanding stock. If properly drafted, such language can eliminate appraisal rights for charter amendments under Section 3-202(a)(4). FOF lacked this reservation in its charter. Nevertheless, the court ultimately held that appraisal rights are neither "contract rights" nor were they "expressly set forth" in the charter. Therefore, the court held that an amendment to the charter eliminating such rights simply does not implicate Section 3-202(a)(4) and trigger the right to demand fair value.

While the logic behind the holding is straightforward, the result is significant. Previously, many practitioners thought it necessary to include charter language reserving the right to make amendments to the charter including amendments altering the terms or contract rights of any outstanding stock. The court's holding in Egan suggests that the absence of such language will not be determinative as to stockholders' rights provided by statute. Instead, to guarantee stockholders appraisal rights in the case of a charter amendment the charter of a Maryland corporation must include an express provision granting or affirming such rights. In the absence of such an express provision, appraisal rights may always be eliminated by charter amendment without implicating Section 3-202(a)(4).

As to Count I, Plaintiffs' argument that the charter amendment and the asset sale were really two steps in one transaction, the court also rejected that argument. The court held that it could not disregard the independent nature of the two proposals/actions in search of a higher equity under the guise of substance over form. Instead, the court concluded that the actions were separate and distinct. As such, the court easily concluded that the approval of the asset sale did not trigger appraisal rights because, at the time of the vote, the charter had eliminated such rights.

In short, Egan establishes that appraisal rights otherwise available to stockholders attendant to a transaction may be eliminated by a charter amendment in the absence of language in the charter expressly granting appraisal rights to the stockholders of any class or series of stock.

The End of Appraisal Rights?

Although not stare decisis, Egan will no doubt be persuasive to future trial courts construing appraisal rights under Maryland law. While Egan offers a clear path to buyers and sellers of Maryland corporations desiring to eliminate appraisal rights attendant to any transaction otherwise subject to appraisal rights under Title 3 Subtitle 2 of the MGCL, the opinion also offers a clear road map to stockholders who desire to protect already limited appraisal rights under Maryland law suggesting that stockholders may start demanding that the express grant of such rights be included in charters.

Other takeaways:

  • Egan did not address the director standard of conduct and whether the board action declaring advisable the charter amendment that eliminated appraisal rights comported with that standard or the statutory business judgment rule. Directors of Maryland corporations considering similar charter amendments will still need to navigate the standard of conduct and the associated standard of review.
  • The limitation on the market-out exception for management led buyouts may be avoided by amending the charter prior to seeking approval for the transaction.
  • It is not clear that the limited charter opt-out in Egan is permissible. Because Plaintiffs did not challenge the limited nature of FOF's opt-out, the court did not consider the issue in Egan. In dicta, however, the court expressed skepticism with regard to the ability of a corporation to eliminate appraisal rights only as to certain acquirers or, implicitly, as to certain events.
  • Although not expressly recognized by the MGCL, contingent stockholder proposals are permissible under Maryland law. In other words, a board may approve a transaction but direct that it be submitted to stockholders only if the stockholders have first approved a different action.

In sum, while Egan is a reminder of the extremely limited availability of appraisal rights in Maryland, it is hardly the final word on the subject.

J.W. Thompson Webb contributed to this blog post.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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