BILL ANALYSIS Ó
AB 1680
Page 1
ASSEMBLY THIRD READING
AB 1680 (Wieckowski)
As Amended April 9, 2012
Majority vote
BANKING & FINANCE 9-3 JUDICIARY 7-2
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|Ayes:|Eng, Charles Calderon, |Ayes:|Feuer, Atkins, Dickinson, |
| |Fletcher, Fuentes, Gatto, | |Huber, Monning, |
| |Roger Hernández, Lara, | |Wieckowski, |
| |Perea, Torres | |Bonnie Lowenthal |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Achadjian, Harkey, |Nays:|Wagner, Jones |
| |Morrell | | |
| | | | |
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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 :
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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 summarizes this section and Corporations Code
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%
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; and,
d) Which the dissenting shareholder has submitted for
endorsement. (Corporations Code Section 1300)
2)Defines "dissenting shareholder" as a record holder of
dissenting shares and includes a transferee of record.
(Corporations Code Section 1300)
3)Provides that fair market value is determined as of the day
before the first announcement of the proposed transaction.
(Corporations 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. (Corporations 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
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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.
(Corporations Code Section 1301)
FISCAL EFFECT : None
COMMENTS :
Background : Historically, during the early evolution of
corporate law in the United States, major corporate actions, such
as mergers, 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/or engage in strategic
action to trigger 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
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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.
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.
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
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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
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, Corporations Code Sections
1300(b)(2) and 1301, have 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
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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
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 this bill would make California's
Corporation Law more similar to Delaware's laws. Delaware is
seen as a more corporation-friendly than 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
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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 name for the
"business" of serving as the official home for corporations.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081 FN:
0003524