BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 1680|
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THIRD READING
Bill No: AB 1680
Author: Wieckowski (D)
Amended: 8/6/12 in Senate
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 makes various changes to California's
dissenter rights law by establishing that the fair market
value of both public and private companies as of the day
of, and immediately prior to the first announcement of the
terms of the proposed reorganization or short-form merger,
and eliminates the provision making holders of publicly
traded shares only eligible to receive the fair market
value of their dissenting shares if five percent or more of
the shares are dissenting shares.
Senate Floor Amendments of 8/6/12 define fair market value,
for purposes of dissenters' rights involving both public
and private California companies, as of the day of, and
immediately prior to the first announcement of the terms of
the proposed reorganization.
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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
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 five percent
of the company's shares perfect their dissenters' rights.
3.Provides that, if at least five percent 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'
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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.Establishes that the fair market value of both public and
private companies as of the day of, and immediately prior
to the first announcement of the terms of the proposed
reorganization or short-form merger.
2.Eliminates the provision making holders of publicly
traded shares only eligible to receive the fair market
value of their dissenting shares if five percent or more
of the shares are dissenting shares.
3.Re-defines "dissenting shares" to include publicly traded
shares for which the holder is entitled to anything
except publicly traded shares of another corporation or
cash in lieu of fractional shares, or a combination of
those shares and that cash.
Comments
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.
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
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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 five percent
of the shareholders of the company being acquired
perfect their dissenters' rights.
The five percent 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
five percent 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 five percent 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.
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However, if more than five percent 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 five percent of the shareholders of
the target company perfect their dissenters' rights.
California's five percent 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 five
percent 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 five
percent exception are not merely hypothetical. A
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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 five percent 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 five
percent 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.
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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
991 do not have any substantive effect.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 6/21/12)
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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 Hern�ndez, Hill, Huber,
Hueso, Huffman, Lara, Bonnie Lowenthal, Ma, Mendoza,
Mitchell, Monning, Pan, Perea, Portantino, Skinner,
Solorio, Swanson, Torres, Wieckowski, Williams, Yamada,
John A. P�rez
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 P�rez
JJA:n 8/8/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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