Washington's Appraisal Rights Statute
Get answers to your questions about Washington's appraisal rights statute.
As is the case with many states—with a significant number of exceptions—minority owners of shares in corporations incorporated in Washington State have certain statutory rights to “dissent” from a limited set of corporate “events” and to demand the “fair value” of their shares. This right is often referred to as an “appraisal” right.
First, the basics. The governing statute is RCW 23B.13.020, “Right to dissent.” Per that statute, shareholders in Washington corporations have the right to dissent from the following corporate actions:
(b) share exchange
(c) disposition of all or substantially all of the property and assets of the corporation (other than in the usual and regular course of business)
(d) amendment of the articles of incorporation, if the amendment effects a redemption or cancellation of all of the shareholder’s shares in exchange for cash or other consideration other than shares of the corporation
(e) certain actions with respect to “social purpose corporations” (outside the scope of this post)
(f) corporate action that the corporation’s articles of incorporation, by-laws, or a board resolution permit shareholder to dissent from
(g) conversion of the company from a Washington domestic corporation to a foreign corporation, but only if the shareholder doesn’t receive the materially same interest in the foreign corporation as it had in the domestic corporation.
(Please see RCW 23B.13.020 for the precise statutory language and important qualifications to all of the above. Please also note that, although outside the scope of this post, the right of a member of a Washington LLC to dissent is limited to mergers only, and can be contracted away in the LLC agreement. RCW 25.15.471.)
Put more succinctly by a Washington appellate court, the unifying feature of the corporate actions subject to dissent is that each “will result in a significant difference in the nature and scope of the business enterprise, or a significant change in the shareholders’ rights in such enterprise.” China Prods. N. Am. v. Manewal, 69 Wn.App. 767, 775, 850 P.2d 565, 569 (Wash. App. Div. 1 1993). As in most things, substance trumps form, so a corporate action that’s called something other than the actions enumerated in the statute but still satisfies the significant difference rule just stated will likely fall under the statute anyways. By the same token, a corporate action that technically meets one of the statutory definitions but in fact doesn’t result in a “significant difference” will not trigger the right to dissent.
Other sections of Chapter 23B.13 set out the procedures that both the corporation and the dissenting shareholder must follow when the corporation proposes an action subject to dissent.
Determining what is the “fair value” of the dissenting shareholder’s shares requires, in effect, an appraisal of the value of the company (hence, “appraisal” right). “Fair value” is not subject to any particular formula, and Washington courts approach this question of fact holistically. See Matthew G. Norton Co. v. Smyth, 112 Wn.App. 865, 51 P.3d 159 (Wash. App. Div. 1 2002). Washington courts disfavor discounts in determining the “fair value,” including in particular marketability discounts and discounts for built-in capital gains. Id.
The right to dissent is not quite an exclusive remedy, but it’s close. A shareholder may not bring an action alleging fraud with respect to one of the enumerated transactions unless the shareholder pleads actual facts that indicate the corporate action was fraudulent, a higher standard than applies to everyday fraud allegations. Sound Infinity Inc. v. Snyder, 169 Wn.2d 199, 237 P.3d 241 (2010). In contrast, Delaware’s dissenter’s rights statute is not exclusive of actions for fraud. See Glassman v. Unocal Exploration Corp., 777 A.2d 242, 248 (Del. Super. Ct. 2001).
Notably, though, Delaware limits its appraisal right in a significant a way that Washington does not. Under Delaware law’s “market out” exception, a shareholder is not entitled to appraisal where the shareholder receives as consideration for the corporate action publicly traded stock. 8 Del. Code § 262(b)(1). This exception has long been criticized, and it does not apply under Washington law.
Maybe you think that everyone incorporates in Delaware anyway, so why worry about Washington State’s appraisal rights statute? Well, here are a few companies you may have heard of that are incorporated in Washington: Microsoft, Costco, Weyerhaeuser, Starbucks, Nordstrom, Zillow, Expedia, and The Hotel Group, to name a few. (Boeing was ahead of the curve and moved its state of incorporation from Washington to Delaware in 1934.)
And while we may not expect Microsoft to be bought out anytime soon, significant deals concerning Washington corporations happen all the time. For instance, the drug-store giant Rite-Aid is acquiring Bartell Drugs, a Seattle-area chain of 67 drug stores founded in 1890 and incorporated in Washington, for $95 million.
If you’re an out-of-state attorney with a client whose appraisal rights in a Washington corporation have been triggered, I’d be more than happy to help you develop, bring, and prosecute that action. Just shoot me an email.