Appraisal Rights and Rejecting the Current Bid
The stock of SMALL Co. is currently trading at $100 and BIG Co. comes in and offers $150/share in a 100/50 stock and cash, respectively, deal. Management rejects the offer saying it is out of line with the long-term plan, bad for shareholders and bad for other constituencies.
Without addressing the question of why management is all of a sudden allowed to take into consideration other constituencies we can first ask how the offer could be bad for shareholders? The market is currently viewing the Small Co. long-term plan as being worth $100. Another buyer believes they have a more productive use of the assets and are willing to buy them for $150. Shareholders would be left with $100 worth of stock and have $50 in cash.
How could this be bad for shareholders who get to make a 50% return instantly with little to no risk? Management claims this is bad for shareholders because the market is currently undervaluing their long-term plan. Once the market realizes the full value of their plan the stock will be worth more - significantly more - than $150.
Why significantly more - risk! The $150 is a sure thing (absent regulatory problems) while the company's long term plan has to be discounted for the uncertainty that it can be achieved. Management's argument is that if the market actually understood that long-term plan and the risk involved the current stock price would be discounted to some level above $150. If management only argues that it should be discounted to only $150 than the sure thing / takeover should always be the choice of a rational shareholder.
So how do we make management accountable? Courts will not enforce appraisal rights because they are not in the position to judge management's business decisions. We cannot set some arbitrary end date by which the stock must hit $150 or we will make management pay the difference because the stock would then trade immediately to $150 - not a penny above if the company is worth less, but also not a penny below.
So what are some sollutions - also, these only work if management and not the corporation pay the expense...to make the corporation pay would be to make shareholders pay themselves...
Offering a special dividend only to those people who own the stock at the time management rejects the offer. At some arbitrary end point the divident will be equal to $150 less the current stock price. The party can sell the stock or the divident right, but they are not attached to one another. This would work, but creates a strong possibility of market manipulation.
Another option is to force management to purchase shares for $150 from any shareholder that wants to sell them - force a MBO.