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
AB 457 (Torres), Page 2
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,
AB 457 (Torres), Page 3
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.
AB 457 (Torres), Page 5
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