BILL ANALYSIS Ó
AB 1680
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Date of Hearing: May 8, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1680 (Wieckowski) - As Amended: April 9, 2012
SUBJECT : DISSENTING SHAREHOLDERS' RIGHTS
KEY ISSUE: IN ORDER TO ADDRESS PROBLEMS REPORTEDLY CAUSED BY
STOCK SPECULATORS TAKING ADVANTAGE OF THIS STATE'S UNIQUE "5%
EXCEPTION RULE", SHOULD CALIFORNIA JOIN THE OTHER 49 STATES IN
THEIR APPROACH TO PROVIDING VERY LIMITED DISSENTERS' RIGHTS TO
SHAREHOLDERS WHO DO NOT APPROVE OF A PROPOSED STOCK-FOR-STOCK
MERGER, IN CASES WHERE THOSE SHAREHOLDERS CAN MITIGATE HARM BY
SIMPLY SELLING THOSE SHARES ON THE STOCK MARKET?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill seeks to revise the California Dissenters' Rights
Statute, in certain narrow circumstances, to eliminate the
ability to receive a cash payout for dissenting shares where the
holders of more than 5% of the shares properly dissent from a
proposed merger. The bill would do away with this so-called "5%
exception" only when the underlying transaction at issue is a
stock-for-stock merger and the stock is in a California Public
Company traded on a national securities exchange (i.e. publicly
traded.) In addition, this bill seeks to address a number of
technical problems in the statute regarding the appropriate
definition of "fair market value" of shares, as well as
clarifying procedural requirements for asserting dissenters'
rights as amended by AB 991 (2009). According to the author,
these relatively narrow changes will help bring California into
conformance with most other states and will improve the
attractiveness of California as a jurisdiction of domicile for
public companies.
SUMMARY : Eliminates a dissenting shareholder's ability to
receive a cash payout in a stock-for-stock merger when the stock
is in a California public company traded on a national
securities exchange, and makes other corresponding changes.
Specifically, this bill :
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1)Establishes that the fair market value of dissenting shares
listed on a national securities exchange (i.e. that are
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, adjusted
as specified.
2)Provides that the fair market value of all other dissenting
shares (i.e. 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, adjusted as
specified.
3)Eliminates the rule making holders of publicly traded shares
eligible to receive fair market value of their dissenting
shares only if 5% or more of the outstanding shares of that
class are dissenting shares.
4)Redefines "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
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
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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. (Corporations Code Section 1300(b). All
further references are to this code unless otherwise
stated.)
2)Defines "dissenting shareholder" as a record holder of
dissenting shares and includes a transferee of record.
(Section 1300.)
3)Provides that fair market value is determined as of the day
before the first announcement of the proposed corporate
reorganization or short-form merger. (Section 1300(a).)
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. (Section 1300(b)(1).)
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.
(Section 1301.)
COMMENTS : This bill seeks to realign the balance of majority
and dissenting shareholder rights in certain limited merger
transactions under the California Corporations Code. The author
explains the need for the bill as follows:
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. This so-called
"5% exception" rule can result in undesirable uncertainty
over the ability of a public company to successfully
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consummate a stock-for-stock merger that has been approved
by the public company's Board of Directors. It can also
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. . . 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 just
to avoid the operation of this exception. California is
alone in its approach (to allow the 5% exception rule) and
this bill will help make California a more attractive
domicile for public companies that are based here in the
state.
Background on dissenter's rights. Historically, during the
early evolution of corporate law in the United States, major
corporate actions required 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
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.
The basis for dissenters' rights is that shareholders who
disagree with the majority of shareholders in a corporate merger
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 because the new investment share may
be inimical to the dissenter's original reason for investing in
the corporation. If the corporation is closely held rather than
publicly traded, these shares can be difficult to liquidate and
dissenter's rights provide an appropriate remedy. Importantly,
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this bill does not decrease or limit dissenter's rights under
California law when the stock is not publicly traded.
Where the shares are publicly traded, however, most states limit
or do not provide dissenters' rights because the dissenter
presumably can sell those shares on a stock exchange for their
fair value with little difficulty. 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 is a disagreement over the value of the share.
Legislative history of the 5% exception. Since 1975, however,
California law differs from other states by according
dissenters' rights when publicly traded shares held by
dissenting shareholders make up 5% or more of the outstanding
shares. Based on our research, California is apparently the
only state that has ever followed this approach. The
legislative history of the adoption of the California
Dissenters' Rights Statute in 1975 indicates that the 5%
exception was adopted as a compromise position between
California's statutory structure prior to 1975, which had no
exception to dissenters' rights for public companies, and modern
trends typified by the Model Business Corporations Act as
adopted by other states at that time. The California law as
initially proposed included a blanket exception to dissenters'
rights for public companies, but given concerns about the
performance of the stock market at that time, the Legislature
apparently compromised between the two positions and adopted the
5% exception.
This bill eliminates the 5% exception in limited circumstances
that makes some mergers in California unnecessarily problematic
as compared to all other states. According to the author, the
5% exception has outlived its usefulness and instead become
problematic due to significant increases in stock speculation,
including the pervasive practice of arbitrage funds quickly
amassing large positions in companies following merger
announcements to take advantage of or even intentionally cause
volatility in the stock. The author contends these practices
were not common when the CA Dissenters' Rights Statute was
enacted in 1975, but have become more pervasive over time since
the law as currently applied still rewards such speculation.
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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.
According to the author, the acquirer will often 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 excessive number
of shareholders dissent.
This bill would only remove dissenters' appraisal rights in a
stock-for-stock merger transaction where the shareholders of the
publicly traded California target corporation are receiving
publicly traded shares of the buyer. According to estimates
provided by the author at the Committee's request,
stock-for-stock mergers are relatively unusual. One practicing
attorney estimated that in the last 10 years there have only
been approximately 30 stock-for-stock mergers where the target
was a California corporation, representing approximately 28% of
the merger and acquisition activity involving California
corporations as targets over that period. The economic impact
of these transactions however is still quite significant for the
state's economy, with the same attorney estimating that the
value of these transactions ranged from approximately $1.9
million to $7.0 billion, with the average deal value
approximating $594 million.
Importantly, the bill does not seek to eliminate the dissenters'
appraisal remedy where the buyer is paying in cash or where the
stock is not publicly traded (a fact that generally renders
those corporations immune from speculation because their stock
is not as easy to acquire.) As the author points out, in most
states, including Delaware, the jurisdiction for most public
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companies do not provide for dissenters' rights in a
stock-for-stock merger involving publicly traded companies
presumably because those states believe such a remedy is
unnecessary where the shareholders can sell their shares in the
public market if they do not support the transaction. The
shareholders are also protected by their ability to potentially
vote against and defeat the proposed transaction, or initiate
litigation if they believe that the transaction arises as a
result of abuse by a controlling shareholder or a conflicted
board of directors. The same circumstances would apply in
California were this bill to be chaptered into law, as
California would simply conform to the practice of Delaware and
most other states that do not have a 5% exception.
This bill clarifies the date used to determine "fair market
value" under the Dissenters' Rights Statute. The Dissenters'
Rights Statute currently enables shareholders that perfect
dissenters' rights 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
(Section 1300(a).) As a result, the author contends, if the
price of shares of the acquiring company's stock being offered
in exchange for a share of the California 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. As previously mentioned, this 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 transaction and will
continue to own shares of the surviving company.
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.
Therefore, to ensure that the most applicable date is used for
determining the fair market value of dissenting shares under
California's Dissenters' Rights Statute and to ensure
consistency among practitioners, this bill provides that the
fair market value of dissenting shares listed on a national
securities exchange (i.e. that are publicly traded) shall be the
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most recent closing price per dissenting share prior to the
first announcement of the terms of the proposed merger. In
using this standard for public companies, the bill ensures that
the most current market price is used for the determination of
"fair market value" for publicly traded shares, and promotes
consistency among practitioners. Importantly, the bill takes a
narrow approach and preserves the existing definition of fair
market value for shares that are not publicly traded.
This bill clarifies recent amendments contained in AB 991 (2009)
in order to preserve the legislative intent of that act.
According to the author, certain provisions in the Dissenters'
Rights Statute regarding voting and notice requirements need to
be corrected to clarify ambiguities caused by recent amendments
to the statute. The legislative history for AB 991 (Silva),
Chapter 131, Statutes of 2009, shows that it is clear that the
amendments were intended to simply clarify that the Nasdaq Stock
Market, as referenced in Corporations Code Section 1300(b), is a
national securities exchange. However, because of the way AB
991 was drafted, those amendments to the code inadvertently
appeared to modify the requirements under Sections 1300 and 1301
affecting how shareholders of a Public Company perfect
dissenters' rights. Following passage of AB 991, the author
states that practitioners report that the new law is often
misinterpreted to require voting and demand notice standards in
perfecting dissenters' rights that are different than the
standards that existed prior to AB 991-in clear contrast to its
modest legislative intent. This bill seeks to correct the
inadvertent confusion and bring the text of the statute into
conformity with the legislative intent.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334
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