The Impact of Appraisal Remedies on the Financial Position of the Private Company

Abstract

Appraisal remedies offer a withdrawal right to minority shareholders who are confronted with midstream-changes in a company. This form of minority protection is a hot topic in (European) company law especially since the introduction of appraisal remedies in the Cross Border Mobility Directive. This article deals with an underexposed risk to this form of minority protection in private companies, namely the impact of the payment of the compensation for the withdrawing shareholder on the financial position of the company. Just as any other distribution, the payment of the compensation could endanger the solvency and liquidity of the company. This is not only relevant for the company creditors but also the remaining shareholders. I will elaborate on this risk and how remedies for creditor protection can temper it. This article argues that this risk will, however, only seldomly occur as the impact on the financial position of the company will have a deterrent effect on the underlying transaction. The most plausible situations in which this risk will occur are ‘do or die’ transactions and the scenario of irrational behaviour of shareholders. For these scenarios, means of creditor protection are needed. Appraisal remedies, withdrawal of shareholders, private companies’ minority protection, creditor protection