BILL ANALYSIS Ó 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 AB 457 (Torres), Page 4 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