BILL ANALYSIS �
AB 1680
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1680 (Wieckowski)
As Amended August 6, 2012
Majority vote
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|ASSEMBLY: |49-23|(May 10, 2012) |SENATE: |37-0 |(August 20, |
| | | | | |2012) |
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Original Committee Reference: B. & F.
SUMMARY : Makes various changes to California's dissenter rights
law. Specifically, this bill :
1)Establishes that the fair market value of dissenting shares
shall be determined, 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 5% or more of the shares are dissenting
shares.
3)Requires a dissenting shareholder who demands that the
corporation purchase his or her shares to include a statement
of what the shareholder claims is the fair market value of
those shares and that statement would constitute an offer by
the shareholder to sell the shares at that price.
4)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.
5)Makes other technical and clarifying changes.
The Senate amendments make clarifying changes as to the
determination of the fair market value.
EXISTING LAW :
1)Defines "dissenting shares" as shares which come within all of
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these descriptions:
a) Which were not immediately prior to the reorganization
or short-form merger listed on any national securities
exchange certified by the Commissioner of Corporations, and
the notice of meeting of shareholders to act upon the
reorganization summarizes this section and Corporations
Code Sections 1301, 1302, 1303 and 1304; provided, however,
that this provision does not apply to any shares with
respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and
provided, further, that this provision does not apply to
any class of shares if demands for payment are filed with
respect to 5% or more of the outstanding shares of that
class;
b) Which were outstanding on the date for the determination
of shareholders entitled to vote on the reorganization and
were not voted in favor of the reorganization or, were held
of record on the effective date of a short-form merger;
c) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value; and,
d) Which the dissenting shareholder has submitted for
endorsement. (Corporations Code Section 1300)
2)Defines "dissenting shareholder" as a record holder of
dissenting shares and includes a transferee of record.
(Corporations Code Section 1300)
3)Provides that fair market value is determined as of the day
before the first announcement of the proposed transaction.
(Corporations Code Section 1300)
4)Provides that the dissenter's rights statute applies to a
public company where there exists any restriction on transfer
with respect to the shareholder's shares or in excess of 5% of
the outstanding shares of the public company voting on the
transaction dissent. (Corporations Code Section 1300)
5)Requires the corporation to notify holders of dissenting
shares of the approval of reorganization, description of
dissenters' rights and the price the corporation believes is
the fair market value of the shares. The shareholder in turn
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must make a written demand to be cashed out within prescribed
time limits. If the value of the shares is agreed upon, then
the corporation must pay the agreed upon price plus interest.
(Corporations Code Section 1301)
AS PASSED BY THE ASSEMBLY , this measure is substantially similar
to the measure passed by the Senate with the exception of
clarifying changes to the fair market value.
FISCAL EFFECT : None
COMMENTS :
Background : Historically, during the early evolution of
corporate law in the United States, major corporate actions,
such as mergers, required the unanimous consent of the
corporation's shareholders under the common-law theory that each
shareholder had a vested property right in the terms of the
corporation's charter and that property right could not be
altered without the individual shareholder's consent. This
presented a serious complication for efficient operation and
effective corporate action and allowed the minority, even a
single shareholder to frustrate the will of the majority and/or
engage in strategic action to trigger special consideration in
certain circumstances. The dissenters' rights remedy developed
as a legislative remedy to protect minority shareholders from
being forced out of their investment at an unfairly low price
and to compensate them for the loss of their common-law right to
preclude a major corporate action, while at the same time
operating to facilitate the occurrence of mergers. Today, the
dissenters' rights is to provide shareholders who dissent from a
merger or other specified major corporate action with an
independent judicial determination of the fair value of their
shares.
The basis for dissenters' rights provisions contained in the
Corporations Code (Sections 1300-1312) is that shareholders who
disagree with the majority of shareholders in a corporate
reorganization or merger of one corporation with another should
be able to have their shares cashed out by the corporation at a
fair market value instead of accepting the share for share
exchange or cash price arrangement approved by the majority
shareholders. The new investment share may be inimical to the
investor's original reason for investing in the corporation,
and, if the corporation is closely held, the shares can be
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difficult to liquidate. In turn for the ability to cash out,
the law generally prohibits these minority shareholders from
seeking to invalidate the reorganization or merger in court, and
their only recourse to legal action is limited to a judicially
backed appraisal of fair market value when there is a
disagreement over the value of the share.
As for publicly traded shares, dissenters' rights are with few
exceptions nonexistent because these shares are easily sold on a
stock exchange for their fair value. The exception to this rule
is where publicly traded shares held by dissenting shareholders
make up 5% or more of the outstanding shares. In this instance,
these shares are accorded full dissenters' rights because it is
believed that the magnitude of this number of shares dumped on
the market at one time would adversely affect the sales.
Need for the bill : The California Dissenters' Rights Statute
includes an exception that creates a dissenters' appraisal
remedy for shareholders of a public company where holders of
more than 5% of the shares of the public company properly
dissent and seek such an appraisal remedy. According to the
author, the 5% exception which the proposed legislation
eliminates can result in undesirable uncertainty over the
ability of a public company to successfully consummate a
stock-for-stock merger that has been approved by the public
company's board of directors and potentially make the public
company vulnerable to stock speculators who accumulate shares in
the public markets for the sole purpose of potentially enriching
themselves at the expense of other long-term minded shareholders
who support the proposed transaction.
The author goes on to state, the problem arises because in a
stock-for-stock merger transaction the acquirer proposes to
purchase all shares of the target public company by paying to
the shareholders of the public company shares of the acquirer's
stock at an agreed upon exchange ratio. The acquirer in such a
transaction is often concerned about the impact of the
California Dissenters' Rights Statute because if the holders of
greater than 5% of the shares of the public company dissent, the
acquirer will need to pay the dissenting shareholders an amount
in cash equal to the fair market value of such shares. The
acquirer will seek to avoid that risk because it may increase
the cost of the transaction to the acquirer or require that the
acquirer pay cash rather than shares of its own stock to
purchase the shares from the dissenting shareholders of the
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public company. In order to avoid that risk, the acquirer will
often require that the public company agree to make closing of
the transaction conditioned upon a limited number of
shareholders of the company perfecting their appraisal rights.
Such a contractual arrangement has the effect of putting the
transaction approved by the Board of Directors of the public
company at risk if an excess number of shareholders dissent.
According to the author, California's 5% exception imposes
unnecessary restraints on public companies, invites stock
speculation and consequently forces California companies to
consider drastic measures, such as reincorporating into a
different jurisdiction, to avoid the operation of California's
Dissenters' Rights Statute. Further, public companies are often
forced to agree to merger provisions that put the transaction at
risk to the extent that their shareholders choose to dissent,
rather than sell their shares in the open market.
Fair market value : The California Corporations Code fixes the
fair market value of a dissenting share as the closing price for
such share on the day before the transaction is first announced.
The consequence of these provisions is that if the price of
shares or the fraction of a share of acquirer stock being
offered in exchange for a share of the public company were to
decline after announcement of the transaction to an amount that
is less than the price per share of the public company on the
day before announcement, speculative shareholders may seek to
exploit the situation by purchasing sufficient shares to trigger
appraisal rights which may have the effect of either preventing
the transaction from closing or allowing the dissenting
shareholders to receive additional payments from the public
company at the expense of the majority of shareholders who have
approved the transaction and will continue to own shares of the
surviving company.
Corporations Code Section 1300(a) provides that shareholders
that perfect dissenters' rights are able to seek "fair market
value" for their shares, and that "fair market value" is to be
determined as of "the day before the first announcement" of the
proposed transaction. This provision, as currently drafted,
leaves open the question of how to properly determine "fair
market value" of publicly traded shares when the transaction is
announced after the close of trading on a day in which the
markets are open, a standard approach to announcing the merger
of a public company.
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Delaware : The changes made in this bill would make California's
Corporation Law more similar to Delaware's laws. Delaware is
seen as more corporation-friendly than a number of other states.
Delaware continues to be the favored state of incorporation for
U.S. businesses. Delaware has been preeminent as the place for
businesses to incorporate since the early 1900s, and its
incorporation business, supplemented by the growth in numbers of
such "alternative entities" as limited liability companies,
limited partnerships and statutory trusts, continues to grow
smartly. Close to a million business entities have made
Delaware their legal home. Furthermore, while the sheer number
of corporations organized in Delaware is significant, more
significant still is the fact that so many large and important
corporations are incorporated in Delaware. Of the corporations
that make up the Fortune 500, more than one-half are
incorporated in Delaware. Delaware has become almost a brand
name for the "business" of serving as the official home for
corporations.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN:
0004556