BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1680|
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THIRD READING
Bill No: AB 1680
Author: Wieckowski (D)
Amended: 4/9/12 in Assembly
Vote: 21
SENATE BANKING AND FINANCIAL INST. COMM . 6-0, 6/20/12
AYES: Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla
NO VOTE RECORDED: Walters
ASSEMBLY FLOOR : 49-23, 5/10/12 - See last page for vote
SUBJECT : Dissenting shareholders rights
SOURCE : Author
DIGEST : This bill amends California's dissenting
shareholders' rights statute by limiting the ability of
shareholders of public companies incorporated in California
to exercise those rights in certain circumstances, revises
the manner in which the fair market value of public
companies incorporated in California is calculated for
purposes of compensating dissenting shareholders, and makes
other technical changes.
ANALYSIS : Existing law:
1.Generally provides that shareholders of companies
incorporated in California, who wish to dissent from a
planned merger or acquisition involving the company in
which they hold shares, are entitled to receive cash in
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an amount equal to the statutorily determined fair market
value of those shares, subject to certain exceptions,
discussed immediately below.
2.Does not entitle shareholders of publicly traded
companies incorporated in California to dissenters'
rights, unless shareholders holding at least 5% of the
company's shares perfect their dissenters' rights.
3.Provides that, if at least 5% of the shareholders of a
public company incorporated in California wish to perfect
their dissenters' rights with respect to a proposed
merger or acquisition, they must:
A. Vote against the proposed transaction; and
B. Make written demand on the corporation for purchase
of their shares at fair market value, no later than
the date of the shareholders meeting to vote on the
proposed transaction.
1.Further provides that, in order to perfect their
dissenters' rights and be entitled to be cashed out for
their shares, shareholders who hold stock in private
companies incorporated in California must:
A. Not vote in favor of the proposed transaction (an
action that is distinctly different from voting
against it); and
B. Make written demand on the corporation for purchase
of their shares at fair market value, within 30 days
after the corporation notifies its shareholders that
the transaction has been approved by its shareholders.
1.Defines fair market value, for purposes of dissenters'
rights involving both public and private California
companies, as of the day before the first announcement of
the terms of a proposed merger or acquisition.
This bill:
1.Amends the law to provide that the shareholders of
publicly traded companies incorporated in California
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could no longer perfect their dissenting shareholders'
rights, except as specified. Under the proposed changes,
the only time that shareholders of a publicly traded
California company would be entitled to perfect their
dissenters' rights is when they were to be compensated
for their shares with something other than unrestricted,
publicly traded shares of another public company, plus
cash in lieu of fractional interests in those shares of
the other company.
2.Applies the following rules in cases where dissenting
shareholders of publicly traded California companies
would continue to be able to perfect their dissenters'
rights. To perfect their dissenters' rights, those
shareholders' have to do both of the following:
A. Vote against the proposed acquisition or merger;
B. Make written demand on the corporation for purchase
of their shares at fair market value no later than the
date of the shareholders meeting to vote on the
proposed transaction.
1.Provides that the fair market value used to calculate the
cash amounts paid to shareholders of publicly traded
companies incorporated in California, who perfect their
dissenters' rights, is the most recent closing price per
share prior to the first announcement of the terms of the
proposed transaction.
Comments
Purpose of the bill . According to the author, this bill
was introduced to remove a provision of California law that
can make it difficult for public companies incorporated in
California to successfully consummate a stock-for-stock
merger or acquisition that has been approved by their
boards of directors and a majority of their shareholders,
and to make technical and clarifying changes to ensure that
California's dissenters' rights statutes work as intended.
This bill has three related provisions, two of which are
substantive, and one of which is technical. Each of the
provisions is summarized separately below.
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1. Provision which limits the ability of dissenting
shareholders of California public companies to perfect
their dissenters' rights
Dissenters' rights laws for public companies are based
on the premise that the shareholder of a public company
has an easy way to voice his/her displeasure with a
proposed merger or acquisition of that company - sell
his/her shares on the open market. That simple remedy
provides an equitable way for shareholders to obtain
fair market value for shares in companies they no longer
wish to own.
The only circumstance in which shareholders of
California public companies may require the company in
which they own shares to buy those shares back at their
fair market value prior to the announcement of the
merger or acquisition occurs when more than 5% of the
shareholders of the company being acquired perfect their
dissenters' rights.
The 5% exception in existing law - an exception which is
unique among the 50 states - reflects a legislative
compromise enacted in 1975. That compromise was
intended as a middle ground between legislators who
believed that a blanket public exemption was appropriate
and legislators who were concerned about the performance
of the stock market at that time. The 5% exception (or
some sort of exception drafted to recognize the
possibility that a significant minority of shareholders
may oppose a planned corporate merger or acquisition)
appears to be a logical way to minimize the possibility
that dissenting shareholders will all rush to sell their
shares at once. Such an action is likely to depress the
value of the stock being sold, and to result in
dissenting shareholders receiving less for those shares
on the open market than they would receive, if they were
cashed out at the fair market value of those shares
prior to the announcement of the merger.
Unfortunately, California's 5% exception creates a
significant disincentive for public companies to
incorporate in California, because it makes them less
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attractive to other companies as merger partners or
acquisition targets. Both companies involved in a
merger or acquisition want certainty. In a
stock-for-stock transaction, each shareholder in the
company being acquired will essentially be trading X
shares of the company they own for Y shares of the
company that will be acquiring the company they own.
However, if more than 5% of the shareholders of the
company being acquired perfect their dissenters' rights,
the stock-for-stock transaction becomes more
complicated, and more costly to the acquirer. The
acquirer not only needs to issue the agreed-upon number
of shares to shareholders who do not perfect their
dissenters' rights, but also needs to pay cash to
shareholders who do perfect their dissenters' rights.
The risk of having to pay cash to dissenters means that
the acquirer may end up paying a higher overall purchase
price for the company it is acquiring or with which it
is merging than was contemplated at the time the
transaction was agreed to. The need to pay cash may
also undermine the balance sheet of the surviving
company.
To mitigate this risk, acquirers commonly impose a
condition to closing, which allows the acquirer to back
out of the transaction, if California's dissenters'
rights statute is triggered. Such a condition to
closing is undesirable for the California target
company, because it introduces uncertainty over whether
the transaction will close. It also indirectly gives a
small minority of shareholders the right to abort a
deal. A corporate transaction, which has been approved
by the boards of directors of both companies, and by a
majority of the shareholders of both companies, can be
at risk if more than 5% of the shareholders of the
target company perfect their dissenters' rights.
California's 5% exception also creates an opportunity
for speculators, who acquire shares of the target
company, with an eye to exercising their dissenters'
rights, if the price of the stock goes down, relative to
its price immediately before the first announcement of
the merger or acquisition. The presence of speculators
can make it more likely that the 5% threshold will be
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reached, and thus more likely that a deal will fail to
close, despite its approval by the boards of both
companies and a majority of the shareholders of both
companies.
The problems that can be posed by California's 5%
exception are not merely hypothetical. A corporate
attorney, who contacted Assemblymember Wieckowski about
the problems this bill seeks to solve, related the
following story: "We recently represented one of
California's largest public companies, Novellus - a
large publicly traded company headquartered in the
Silicon Valley that makes sophisticated tools used by
companies like Intel to manufacture semiconductor
products. Novellus is exactly the kind of company
California most wants to attract - it creates great
jobs, is profitable, well managed and develops leading
edge technology. It is also unusual because it is
incorporated in the State of California. Most other
large California corporations choose to incorporate in
Delaware. They do so because of the many peculiar
provisions in the California Corporations Code. One of
those provisions, the dissenters' rights statute, became
a real problem when Novellus was approached by Lam
Research, a Fremont-based company that unlike Novellus
is incorporated in Delaware. Lam Research proposed to
acquire Novellus in a stock-for-stock merger in which it
would give each Novellus shareholder a certain number of
shares of Lam stock. After considerable discussion and
evaluation of alternatives, Novellus concluded that the
Lam Research proposal would be a good outcome for
Novellus shareholders and we moved forward to negotiate
a deal. One of the main issues we were confronted with
was how to deal with the California dissenters' rights
statute because the Lam Research team made it clear that
Lam, as a Delaware company, was unwilling to take the
risk of greater cost or greater cash expense that would
be imposed if greater than 5% of the shareholders of
Novellus dissented from the transaction. Novellus, the
California corporation, was forced to choose between
reincorporating in Delaware, a state that does not give
shareholders of a public company dissenters' rights in a
stock-for-stock merger, killing the deal, or taking the
risk of dissenters' rights by agreeing to a condition to
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closing insisted upon by Lam whereby Lam could kill the
deal if greater than 5% of the Novellus shareholders
dissented." Novellus ultimately decided to take the
risk, and it appears to have paid off for both Lam and
Novellus stockholders, but the same might not be true of
other companies, faced with the same dilemma as
Novellus.
2. Provision which changes the way in which the fair market
value of California public companies is calculated for
purposes of dissenting shareholders' right
This provision makes no changes to the way in which the
fair market value of privately held companies
incorporated in California is calculated. Those shares
will continue to be calculated as of the day before the
day on which the first announcement of the merger or
acquisition is made public.
This provision proposes to change only the way in which
the fair market value of publicly traded companies
incorporated in California is calculated. Because
mergers and acquisitions are commonly announced after
the markets close, the closing value of a stock on the
day of an announcement can be more representative of
that company's current market value than its closing
value on the day before the announcement. The proposed
change ensures that the most recent closing market value
prior to the announcement is the value that is used.
3. Technical and Clarifying Provision
AB 991 (Silva), Chapter 131, Statutes of 2009, was a
cleanup measure sponsored by the Corporations Committee
of the Business Law Section of the California State Bar
to make technical and clarifying changes to various
sections of the Corporations Code. It was not intended
to enact any substantive changes. However, in the time
since the 2009 legislation was enacted, some have
misinterpreted the meaning of its changes to the
dissenting shareholders' rights statutes, and have
inferred significance to these changes, which was never
intended. The technical changes made by this bill AB
1680 are intended to clarify that the changes made by AB
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991 do not have any substantive effect.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 6/21/12)
Novellus
ASSEMBLY FLOOR : 49-23, 5/10/12
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bonilla, Bradford, Brownley, Buchanan,
Butler, Campos, Carter, Cedillo, Chesbro, Davis,
Dickinson, Eng, Feuer, Fong, Fuentes, Galgiani, Gatto,
Gordon, Hall, Hayashi, Roger Hernández, Hill, Huber,
Hueso, Huffman, Lara, Bonnie Lowenthal, Ma, Mendoza,
Mitchell, Monning, Pan, Perea, Portantino, Skinner,
Solorio, Swanson, Torres, Wieckowski, Williams, Yamada,
John A. Pérez
NOES: Achadjian, Bill Berryhill, Conway, Donnelly, Beth
Gaines, Garrick, Grove, Hagman, Halderman, Harkey, Jones,
Knight, Logue, Mansoor, Miller, Morrell, Nestande,
Nielsen, Norby, Silva, Smyth, Valadao, Wagner
NO VOTE RECORDED: Charles Calderon, Cook, Fletcher,
Furutani, Gorell, Jeffries, Olsen, V. Manuel Pérez
JJA:n 6/21/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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