BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 1680 (Wieckowski) Hearing Date: June 20, 2012
As Amended: April 9, 2012
Fiscal: No
Urgency: No
SUMMARY Would amend 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, revise the manner in which the fair
market value of public companies incorporated in California is
calculated for purposes of compensating dissenting shareholders,
and make other technical changes.
DESCRIPTION
1. Would amend the law to provide that the shareholders of
publicly traded companies incorporated in California 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. Would apply 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' would
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.
AB 1680 (Wieckowski), Page 2
3. Would provide 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.
EXISTING LAW
4. 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 an amount
equal to the statutorily determined fair market value of
those shares, subject to certain exceptions, discussed
immediately below.
5. 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.
6. 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.
7. 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
AB 1680 (Wieckowski), Page 3
transaction has been approved by its shareholders.
8. 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.
COMMENTS
1. Purpose: This bill is sponsored by the author, 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.
2. Background and Discussion: 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.
a. 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 or her displeasure with a proposed merger or
acquisition of that company - sell his or 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
AB 1680 (Wieckowski), Page 4
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
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
AB 1680 (Wieckowski), Page 5
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 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
AB 1680 (Wieckowski), Page 6
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
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.
b. 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.
c. 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
AB 1680 (Wieckowski), Page 7
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 AB 1680 are intended to clarify that the changes
made by AB 991 do not have any substantive effect.
3. Summary of Arguments in Support: None received.
4. Summary of Arguments in Opposition: None received.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Novellus
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102