3.4.2 Appraisal right of S. 111 IA 1986

Sections 110 and 111 IA 1986 can be used for the reorganization of companies. Under S. 110 IA 1986, it is possible to wind up a company ("transferor") voluntarily and transfer or sell the business or the property of the transferor wholly or partly to another company ("transferee"). For this type of reorganization, a special resolution is required.1 As compensation for the transfer or sale, the liquidator of the transferor may receive shares in the transferee company, or policies or other interests in the transferee company. The liquidator has to distribute these shares, policies or similar interests among the members of the transferor company.

A member who did not vote in favour of the special resolution is entitled to use the appraisal right provided for in Section 111 IA 1986. In order to qualify for the appraisal right, the member needs to express his dissent with the reorganization. The member must express his dissent in writing, addressed to the liquidator, and deliver it to the company's registered office, within seven days after the resolution is passed.

Subsequently, it is up to the liquidator to either abstain from carrying out the resolution or to choose for the buy-out of the member. If the liquidator chooses to purchase the shares, the price of the shares has to be determined by agreement or by arbitration.2 Next, a special resolution is required to determine how the liquidator should raise the funds needed to purchase the shares. The shareholder must be compensated before the winding-up enters into effect. Davies puts forward that if dissent of any shareholder potentially threatens the scheme, usuallyan alternative restructuring route will be chosen, which route does not entitle the member to a appraisal right.3

The CLR held that there is significant doubt whether S. 111 IA 1986 with respect to the valuation of the shares is compatible with the Human Rights Act 1998, the English implementation of the ECHR.4 This section provides that valuation must take place by way of agreement or compulsory arbitration. The CLR recommended that the valuation has to be carried out by a valuer appointed by the court, with the attached right to appeal to the court. I approve of this recommendation and refer to § 2.2.3.2 and § 2.2.3.3 of this study for further arguments.

The CLR shared its view on how shares have to be valued when the appraisal right is used. First, it sketched out that there were three options to value the shares. The first option is to value the shares as a proportionate value on a going-concern basis prior to the transfer or sale to the transferee company. The second option is to value the shares as a proportionate value of the consideration offered by the transferee company for the transfer or sale as if in effect. The third option is to value the shares as a proportionate value on the hypothetical basis that liquidation takes place without the sale of the business or the property of the (transferor) company. The CLR found that the second option is the most favourable, since it can be applied straight away. The CLR therefore proposed that this valuation has to be laid down in new legislation. Up to now, this call has not been answered.