6.2.1 Purpose of the appraisal remedy

As a remedy for minority shareholders, the purpose of the appraisal remedy is, in a broad sense, to protect the interests of minority shareholders. Being a specific remedy, however, the appraisal remedy should have its particular purpose(s) to achieve. A few historical and current purposes have been advanced by scholars, namely compensation for the loss of veto rights, facilitation of liquidity, exit at fair value, group coordination, and discovery as well as a monitoring function. After deliberating, I attach value to the purposes of facilitating liquidity and exit at fair value. As majority rule is a well-established corporate norm nowadays, the view of compensation for loss of veto power has become obsolete.

The purpose of group coordination has been advanced by Professor Fischel, who believes that appraisal rights can prevent a clever bidder from benefiting himself as a result of shareholders' lack of coordination by, for example, designing a two-tier arrangement.1 According to him, the appraisal remedy can discourage the substantially low price in the second step of the transaction and ensure the remaining shareholders a fair value. This remedy can therefore protect all shares from a `value reducing transaction'.2 In my opinion, this purpose is a sensible justification for the appraisal remedy, but not a purpose of the appraisal remedy in itself. It reiterates the function of exit at fair value and helps to explain how the appraisal remedy works to ensure a fair value in certain transactions. Besides, the appraisal remedy is not only about takeover bids followed by a merger. Other occasions such as amendments of articles of association are allowed as well, so the function of group coordination is limited.

Again, I do not think the purpose of discovery and monitoring proposed by Kanda and Levmore explains the main role of the appraisal remedy.3 Admittedly, the appraisal remedy enables dissenting shareholders to discover possible misbehaviour and gain information in appraisal proceedings which may be useful to file claims of unfair dealing or breach of fiduciary duty in a separate lawsuit after the appraisal claim has been brought, but this is only an ancillary function of the appraisal proceeding.

In my view, the purpose of liquidity still plays a role nowadays. Without this remedy, dissenting shareholders are locked in the corporation even though the company has fundamentally changed and is subsequently operating in a totally new direction. The significance of such a function is waning, however, because instead of wishing to jump the ship, the majority appraisal rights cases involve cash-out mergers by which the minority is forced out.4 In this case, the availability of liquidity is a foregone conclusion; the protection needed by minority shareholders is to leave with the 'fair value' of their shares. I therefore conclude that although the liquidity function has remained viable, its purpose is largely to ensure fair value to dissenting shareholders.

In China, this remedy has been introduced with the same protective purpose, trying to ensure that the minority shareholders receive a reasonable value of their shares when there is a structural change in the company. But, unfortunately, this purpose is not guaranteed by the provisions because no rules guiding the calculation of a reasonable value exist. Furthermore, the substantive scope of Article 75 is not broad and refined enough to offer protection to minority shareholders. To help this remedy to fulfil its purpose, this research therefore explores the above two areas, namely appraisal triggers and fair value. I will start with my fmdings on appraisal triggers in the following part.