BILL ANALYSIS                                                                                                                                                                                                    






                  SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
                              Senator Lou Correa, Chair
                              2013-2014 Regular Session

          AB 457 (Torres)                         Hearing Date:  June 5,  
          2013  

          As Introduced: February 19, 2013
          Fiscal:             No
          Urgency:       No
          

           SUMMARY    Would eliminate the requirement that corporations  
          which fail to solicit the written consent of all of their  
          shareholders for specified corporate reorganizations wait at  
          least 10 days following their shareholder votes, before acting  
          to implement those reorganizations.  
          
           DESCRIPTION
           
            1.  Would, with respect to a reorganization vote on which  
              shareholders have the right to demand cash for their shares  
              pursuant to California's dissenters' rights statute,  
              eliminate the requirement that a corporation, which takes a  
              vote on that reorganization without soliciting written  
              consent from all of its shareholders, wait at least ten days  
              before consummating the approved reorganization.  

           EXISTING LAW
           
           2.  States that, unless otherwise provided, any action that may  
              be taken by a corporation at any annual or special meeting  
              of shareholders may be taken without a meeting and without  
              prior notice, if a consent in writing, setting forth the  
              action, is provided by holders of outstanding shares equal  
              to or greater than the minimum number of votes that would  
              have been necessary to authorize or take that action at a  
              meeting (Corporations Code Section 603).  

           3.  Further provides that, if a vote is taken by written  
              consent (i.e., outside of a shareholder meeting), and if the  
              consents of all shareholders entitled to vote are not  
              solicited in writing by a corporation as part of that vote,  
              the corporation must provide prompt notice of the approved  
              action to all of its shareholders, and must wait at least  
              ten days before consummating certain types of actions  




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              authorized by that vote (Corporations Code Section 603;  
              these actions include corporate reorganizations, conversions  
              of corporations into domestic other business entities,  
              shareholder distributions upon dissolution, indemnification  
              of directors and officers, and agreements between directors  
              and corporations).  It is this ten-day waiting period from  
              which this bill seeks to exempt reorganization votes on  
              which dissenters' rights may be exercised.  

           COMMENTS

          1.  Purpose:   This bill is intended to eliminate a provision of  
              law that the bill's sponsor, the Corporations Committee of  
              the Business Law Section of the California State Bar, sees  
              as potentially harmful to corporations seeking to carry out  
              shareholder-approved reorganizations in as quick and  
              efficient a manner as possible.  

           2.  Background:   The ability of California corporations to  
              obtain shareholder consent for certain actions outside of  
              shareholder meetings has been recognized in California law  
              since 1977.  Under existing law, a corporation may solicit  
              shareholder consent for an action outside of an annual or  
              special shareholder meeting, and may act based on consent  
              received for that action, as long as consent, in writing,  
              setting forth the proposed action, is received from a  
              percentage of shareholders that is at least as large as the  
              percentage of shareholders that would have been required to  
              authorize or take that action, if it had been voted on at a  
              shareholder meeting.  

          California law does not require a corporation that seeks  
              shareholder approval for actions outside of a shareholder  
              meeting to solicit the approval of all of its shareholders  
              for those actions; as long as the corporation receives  
              enough votes in support of its proposed actions, it can  
              choose to solicit a subset of its shareholders for the  
              necessary approval.  When fewer than all shareholders are  
              solicited for approval of an action, California law requires  
              that a corporation notify those shareholders whose written  
              consent was not received for that action about the action  
              that was approved.  California law also requires a 10-day  
              waiting period between the required notice and the ability  
              of a corporation to consummate approved actions in certain  
              cases.  These special cases, where actions require a 10-day  
              waiting period, include corporate reorganizations,  




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              conversions of corporations into domestic other business  
              entities, shareholder distributions upon dissolution,  
              indemnification of directors and officers, and agreements  
              between directors and corporations.  This bill would remove  
              the 10-day waiting period for corporate reorganizations with  
              respect to which shareholders are entitled to demand cash  
              for their shares pursuant to California's dissenters' rights  
              statute.  

          Dissenters' rights laws acknowledge the possibility that some  
              shareholders who hold shares in a company that is merging  
              with or becoming acquired by another company may wish to  
              divest themselves of their shares, and be compensated for  
              those shares at their fair market value.  In California,  
              shareholders of both publicly-traded and privately-held  
              corporations are entitled to demand cash for their shares  
              pursuant to California's dissenters' rights statute.   
              However, as discussed below, this bill would only impact  
              privately-held corporations.  

          According to this bill's sponsor, Rule 14c-2 of the Securities  
              and Exchange Commission's (SEC's) proxy rules require all  
              public companies who obtain shareholder approval for an  
              action via written consent to inform all of its shareholders  
              of the approved action at least 20 days before taking that  
              action.  That 20-day waiting period remains unaffected by  
              this bill.

          The net result:  Because public corporations would still have to  
              observe the 20-day waiting period required by the SEC, this  
              bill's changes would only have the effect  of eliminating  
              the 10-day waiting period in state law for privately-held  
              corporations.  

           3.  Rationale:    According to this bill's sponsor, corporations  
              may choose to solicit the consent of less than all of their  
              shareholders for certain actions.  Soliciting a subset of  
              shareholders can be done to limit the number of people who  
              are alerted to a planned reorganization, which can sometimes  
              be helpful for strategic reasons.  Soliciting a subset of  
              shareholders can also represent a cost-saving measure, since  
              it reduces the costs associated with preparing, printing,  
              and mailing solicitation materials to all shareholders.  The  
              sponsor states, "These costs and fees seem entirely  
              unnecessary and burdensome if shareholders holding the  
              required number of shares to approve the reorganization have  




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              already approved the transaction...it seems wasteful to  
              require California corporations to prepare solicitation  
              materials and solicit consents from all shareholders to  
              avoid a waiting period and the risks associated therewith  
              when the requisite shareholder approval is a fait accompli."

           4.  Will This Proposal Negatively Impact Dissenting  
              Shareholders?   This bill's sponsor claims not.  In support  
              of its position, the sponsor observes that AB 457 does  
              nothing to alter the time periods built into California's  
              dissenters' right statute.  Even if this bill is enacted,  
              California corporations whose shareholders have approved  
              reorganizations subject to dissenters' rights would still be  
              required to notify their shareholders of the approval,  
              provide them with copies of the dissenters' rights statutes,  
              inform them of the procedure that must be followed by a  
              shareholder wishing to exercise his or her dissenters'  
              rights, and state the price that the corporation deems to be  
              the fair market value of the shares.  Dissenting  
              shareholders would continue to have 30 days in which to  
              demand an independent appraisal of their company shares, and  
              would continue to have six months in which to commence an  
              appraisal action in Superior Court.

          The sponsor also observes that AB 457 does not propose to alter  
              the fiduciary duty owed by a board of directors to all  
              shareholders, and by majority shareholders to minority  
              shareholders.  These fiduciary duties provide direct  
              recourse for aggrieved shareholders who disagree with an  
              action that was approved via consent from a subset of  
              shareholders.  A minority shareholder whose written consent  
              was not solicited would retain the ability to sue members of  
              the board of majority shareholders for cash damages.

          Finally, the sponsor observes that nothing prevents a  
              shareholder or a group or shareholders from requiring, as a  
              condition of their investment in a corporation, that the  
              corporation and other shareholders contractually agree to  
              obtain the approval of the shareholder or group of  
              shareholders prior to specified corporate actions, including  
              reorganizations with dissenters' rights.

           5.  Summary of Arguments in Support:   The Corporations Committee  
              of the Business Law Section of the California State Bar is  
              sponsoring AB 457 for the reasons described above.





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           6.  Summary of Arguments in Opposition:    None received.
        
          7.  Prior and Related Legislation:   

               a.     AB 1680 (Wieckowski), Chapter 473, Statutes of 2012:  
                  Revised California's dissenters' rights statutes by  
                 limiting the ability of shareholders of public companies  
                 incorporated in California to exercise those rights in  
                 certain circumstances and revising the manner in which  
                 the fair market value of public companies incorporated in  
                 California is calculated for purposes of compensating  
                 dissenting shareholders.

           
          LIST OF REGISTERED SUPPORT/OPPOSITION
          
          Support
           
          Corporations Committee of the Business Law Section of the  
          California State Bar (sponsor)
           
          Opposition
               
          None received

          Consultant: Eileen Newhall  (916) 651-4102