Dissenters Rights Pt. 1 – What Are They? Who Has Them?
Minority owners of closely held businesses in Washington have substantially limited rights once the majority owners decide to take certain, major actions. In fact, it can be said that the only right a minority owner has is the right to “dissent.” Today’s post identifies “dissenters rights” and when they can be exercised depending on the type of entity.
What are Dissenters’ Rights?
Washington business entity statutes provide a process by which business owners can “dissent” and demand “fair value” for their interest in certain circumstances. The Corporate Act defines a “dissenter” as a “shareholder who is entitled to dissent from corporate action under RCW 23B.13.020 and who exercises that right when and in the manner required by RCW 23B.13.200 through 23B.13.280.” RCW 23B.13.010(2). The LLC Act defines a “dissenter” as a “member who is entitled to dissent from a plan of merger and who exercises that right when and in the manner required by this article.” RCW 25.15.466(1).[1]
The following table outlines the events that trigger a shareholder/member’s right to dissent:
| Corporation – RCW 23B.13.020 | LLC – RCW 25.15.471 |
| Merger – (1)(a) | Merger – (1) |
| Share Exchange – (1)(b) | |
| Sale, lease, exchange, or other disposition of all/substantially all of the corporation’s property/assets – (1)(c) | |
| Amendment to articles of incorporation if amendment effects a redemption/cancellation of shares – (1)(d) | |
| Election by the corporation to become a social purpose corporation – (1)(e); RCW 23B.25.120(1) | |
| Election by the corporation to cease being a social purpose corporation – (1)(e); RCW 23B.25.120(2) | |
| Amendment of the social purpose corporation’s articles of incorporation that would materially change one or more of the corporation’s social purposes – (1)(e); RCW 23B.25.120(3) | |
| Any corporate action approved pursuant to a shareholder vote – (1)(f) | |
| Plan of entity conversion – (1)(g) |
Once a shareholder or member dissents, the entity and the owner engage in a statutory process whereby the entity purchases the dissenting owner’s interest.
It is important to note that “dissenters” may forfeit their right to dissent, and thus lose their right to obtain payment for their interest. Dissenting shareholders forfeit their right to payment for their shares if they fail to vote against one of the proposed actions enumerated in RCW 23B.13.020(1)(a)-(g), RCW 23B.13.210, or if they fail to timely demand payment for their shares, RCW 23B.13.230(3). Dissenting members also forfeit their right to payment for their interest if they fail to vote against the proposed merger, RCW 25.15.481, or if they fail to timely submit a demand for payment, RCW 25.15.491(2).
Takeaways
The area of dissenters’ rights frequently causes missteps from practitioners. The most important thing in treading through this area of law is to read and understand the statutory scheme. Specifically, complying with the notice and demand requirements within the Corporate Act and the LLC Act are often the most important hurdles to a successful dissent. In the same way, if a corporation or LLC fails to comply with the notice and demand requirements within the Corporate Act and LLC Act, the entity’s action may collapse. As I noted in last week’s post, the right to dissent is a shareholder or member’s exclusive remedy, unless the merger is fraudulent, or the business fails to comply with the Corporate Act or the LLC Act. RCW 23B.13.020(2); RCW 25.15.471(2).
A merger can be a useful tool to fundamentally change the corporate structure, or even amend an LLC agreement with less than unanimous consent. For example, there are a number of Delaware cases arising out of an LLC’s merger into a new LLC with a brand-new LLC agreement to the exclusion of a minority member – subject only to the minority member’s right to dissent and demand fair value. In next week’s post, I will discuss the concept of “fair value” and how it is determined.
Professionals counseling corporations/LLCs and shareholders/members through major actions such as amendments to articles of incorporation or mergers must wade carefully through the weeds of the relevant statutes. Failure to comply could prove fatal to an owner’s claim to payment for their interest or a business’s attempted merger.
For more Washington business entity law considerations, refer to this blog every Wednesday at 12 PM, noon.
BERESFORD BOOTH has made this content available to the general public for informational purposes only. The information on this site is not intended to convey legal opinions or legal advice.
[1] It is worth noting that general partnerships and limited partnerships also provide dissenters’ rights statutes as provided in Article 10 of RCW 25.05 and Article 12 of RCW 25.10 respectively. These statutes are substantially similar to the dissenters’ rights provisions of LLCs.