BILL ANALYSIS Ó
AB 1680
Page 1
Date of Hearing: April 16, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 1680 (Wieckowski) - As Amended: April 9, 2012
SUBJECT : Dissenting shareholders' rights.
SUMMARY : Makes various changes to California's dissenter
rights law. Specifically, this bill :
1)Establishes that the fair market value of shares publicly
traded shall be the most recent closing price per dissenting
share prior to the first announcement of the terms of the
proposed reorganization or short-form merger.
2)Provides that the fair market value of dissenting shares that
are not publicly traded shall be determined as of the day
before the first announcement of the terms of the proposed
reorganization or short-form merger.
3)Eliminates the provision making holders of publicly traded
shares only eligible to receive the fair market value of their
dissenting shares if 5% or more of the shares are dissenting
shares.
4)Re-defines "dissenting shares" to include publicly traded
shares for which the holder is entitled to anything except
publicly traded shares of another corporation or cash in lieu
of fractional shares, or a combination of those shares and
that cash.
EXISTING LAW
1)Defines "dissenting shares" as shares which come within all of
these descriptions:
a) Which were not immediately prior to the reorganization
or short-form merger listed on any national securities
exchange certified by the Commissioner of Corporations, and
the notice of meeting of shareholders to act upon the
reorganization summarize this section and Sections 1301,
1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there
exists any restriction on transfer imposed by the
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corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of
shares if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
b) Which were outstanding on the date for the determination
of shareholders entitled to vote on the reorganization and
were not voted in favor of the reorganization or, were held
of record on the effective date of a short-form merger.
c) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value.
d) Which the dissenting shareholder has submitted for
endorsement. ÝCorporations Code, Section 1300]
2)Defines "dissenting shareholder" as a record holder of
dissenting shares and includes a transferee of record.
ÝCorporations Code, Section 1300]
3)Provides that fair market value is determined as of the day
before the first announcement of the proposed transaction.
ÝCorporations Code, Section 1300]
4)Provides that the dissenter's rights statute applies to a
public company where there exists any restriction on transfer
with respect to the shareholder's shares or in excess of 5% of
the outstanding shares of the public company voting on the
transaction dissent. ÝCorporations Code, Section 1300]
5)Requires the corporation to notify holders of dissenting
shares of the approval of reorganization, description of
dissenters' rights and the price the corporation believes is
the fair market value of the shares. The shareholder in turn
must make a written demand to be cashed out within prescribed
time limits. If the value of the shares is agreed upon, then
the corporation must pay the agreed upon price plus interest.
ÝCorporations Code, Section 1301]
FISCAL EFFECT : None.
BACKGROUND:
Historically, during the early evolution of corporate law in the
United States, major corporate actions, such as mergers required
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the unanimous consent of the corporation's shareholders under
the common-law theory that each shareholder had a vested
property right in the terms of the corporation's charter and
that property right could not be altered without the individual
shareholder's consent. This presented a serious complication
for efficient operation and effective corporate action and
allowed the minority, even a single shareholder to frustrate the
will of the majority and/or engage in strategic action to exact
special consideration in certain circumstances. The dissenters'
rights remedy developed as a legislative remedy to protect
minority shareholders from being forced out of their investment
at an unfairly low price and to compensate them for the loss of
their common-law right to preclude a major corporate action,
while at the same time operating to facilitate the occurrence of
mergers. Today, the dissenters' rights is to provide
shareholders who dissent from a merger or other specified major
corporate action with an independent judicial determination of
the fair value of their shares.
The basis for dissenters' rights provisions contained in the
Corporations Code (Sections 1300-1312) is that shareholders who
disagree with the majority of shareholders in a corporate
reorganization or merger of one corporation with another, should
be able to have their shares cashed out by the corporation at a
fair market value instead of accepting the share for share
exchange or cash price arrangement approved by the majority
shareholders. The new investment share may be inimical to the
investor's original reason for investing in the corporation,
and, if the corporation is closely held, the shares can be
difficult to liquidate. In turn for the ability to cash out,
the law generally prohibits these minority shareholders from
seeking to invalidate the reorganization or merger in court, and
their only recourse to legal action is limited to a judicially
backed appraisal of fair market value when there's a
disagreement over the value of the share.
As for publicly traded shares, dissenters' rights are with few
exceptions nonexistent because these shares are easily sold on a
stock exchange for their fair value. The exception to this rule
is where publicly traded shares held by dissenting shareholders
make up 5% or more of the outstanding shares. In this instance,
these shares are accorded full dissenters' rights because it is
believed that the magnitude of this number of shares dumped on
the market at one time would adversely affect the sales.
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NEED FOR THE BILL :
The California Dissenters' Rights Statute includes an exception
that creates a dissenters' appraisal remedy for shareholders of
a public company where holders of more than 5% of the shares of
the public company properly dissent and seek such an appraisal
remedy. According to the Author, the 5% exception which the
proposed legislation eliminates can result in undesirable
uncertainty over the ability of a public company to successfully
consummate a stock-for-stock merger that has been approved by
the public company's Board of Directors and potentially make the
public company vulnerable to stock speculators who accumulate
shares in the public markets for the sole purpose of potentially
enriching themselves at the expense of other long-term minded
shareholders who support the proposed transaction.
The Author goes on to state, the problem arises because in a
stock-for-stock merger transaction the acquirer proposes to
purchase all shares of the target public company by paying to
the shareholders of the public company shares of the acquirer's
stock at an agreed upon exchange ratio. The acquirer in such a
transaction is often concerned about the impact of the
California Dissenters' Rights Statute because if the holders of
greater than 5% of the shares of the public company dissent, the
acquirer will need to pay the dissenting shareholders an amount
in cash equal to the fair market value of such shares. The
acquirer will seek to avoid that risk because it may increase
the cost of the transaction to the acquirer or require that the
acquirer pay cash rather than shares of its own stock to
purchase the shares from the dissenting shareholders of the
public company. In order to avoid that risk, the acquirer will
often require that the public company agree to make closing of
the transaction conditioned upon a limited number of
shareholders of the company perfecting their appraisal rights.
Such a contractual arrangement has the effect of putting the
transaction approved by the Board of Directors of the public
company at risk if an excess number of shareholders dissent.
According to the Author, California's 5% Exception imposes
unnecessary restraints on public companies, invites stock
speculation and consequently forces California companies to
consider drastic measures, such as reincorporating into a
different jurisdiction, to avoid the operation of California's
Dissenters' Rights Statute. Further, public companies are often
forced to agree to merger provisions that put the transaction at
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risk to the extent that their shareholders choose to dissent,
rather than sell their shares in the open market.
AB 991 FIX
AB 991 (Silva) chapter 131, Statutes of 2009, updated references
to the Nasdaq Stock Market, as it had become a national
securities exchange in 2006. However, due to the way in which
AB 991 was drafted, the amendments inadvertently appeared to
modify the requirements under Corporations Code, Sections 1300
and 1301 affecting how shareholders of a Public Company perfect
dissenters' rights. AB 991 deleted the provisions that
distinguished Nasdaq from the reference to other national
securities exchanges.
According to the Author, since 2009, California's Dissenters'
Right Statute, and in particular, Sections 1300(b) (2) and 1301,
has been repeatedly misinterpreted by California practitioners.
Indeed, in surveying transactions involving public companies
since 2009, it is clear that the AB 991 created confusion on the
correct standard to be applied for perfecting dissenters'
rights. California practitioners have misinterpreted
California's Dissenters' Rights Statute by requiring
shareholders of public companies desiring to perfect dissenters
rights to only refrain from voting in favor of the transaction
and make written demand on the corporation within 30 days after
the corporation provides the shareholder notice that the
transaction has been approved by its shareholders.
FAIR MARKET VALUE
The California Corporations Code fixes the fair market value of
a dissenting share as the closing price for such share on the
day before the transaction is first announced. The consequence
of these provisions is that if the price of shares or the
fraction of a share of acquirer stock being offered in exchange
for a share of the public company were to decline after
announcement of the transaction to an amount that is less than
the price per share of the public company on the day before
announcement, speculative shareholders may seek to exploit the
situation by purchasing sufficient shares to trigger appraisal
rights which may have the effect of either preventing the
transaction from closing or allowing the dissenting shareholders
to receive additional payments from the public company at the
expense of the majority of shareholders who have approved the
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transaction and will continue to own shares of the surviving
company.
Corporations Code, Section 1300(a) provides that shareholders
that perfect dissenters' rights are able to seek "fair market
value" for their shares, and that "fair market value" is to be
determined as of "the day before the first announcement" of the
proposed transaction. This provision, as currently drafted,
leaves open the question of how to properly determine "fair
market value" of publicly traded shares when the transaction is
announced after the close of trading on a day in which the
markets are open, a standard approach to announcing the merger
of a public company.
To ensure that the most applicable date is used for determining
the fair market value of dissenting shares under California's
Dissenters' Rights Statute as it relates to Public Companies,
and to ensure consistency among practitioners, the standard
should be linked to the date of the most recent closing price
prior to the announcement of the transaction (regardless if a
transaction is announced before the market opens, or after the
market closes). In using this standard for public companies,
practitioners will be more consistent in determining the correct
date for purposes of establishing "fair market value" and it
ensures that the most current market price is used for the
determination.
DELAWARE
The changes made in AB 1680 would make California's Corporation
Law more similar to Delaware's laws. Delaware is seen as a more
corporation friendly then a number of other states. Delaware
continues to be the favored state of incorporation for U.S.
businesses. Delaware has been preeminent as the place for
businesses to incorporate since the early 1900s, and its
incorporation business, supplemented by the growth in numbers of
such "alternative entities" as limited liability companies,
limited partnerships and statutory trusts, continues to grow
smartly. Close to a million business entities have made Delaware
their legal home. Furthermore, while the sheer number of
corporations organized in Delaware is significant, more
significant still is the fact that so many large and important
corporations are incorporated in Delaware. Of the corporations
that make up the Fortune 500, more than one-half are
incorporated in Delaware. Delaware has become almost a brand
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name for the "business" of serving as the official home for
corporations.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081