California Bill Threatens Market Exception For Dissenters’ Rights

The California legislature is taking its summer recess and will reconvene on August 6.  Joint Rule 51(b)(2).  It will then sit until August 31 which is the last day for either the Senate or the Assembly to pass bills.  Cal. Const. Art. IV, §10(c) and Joint Rule. 61(b)(17).

One bill that has been somewhat of a sleeper is AB 1680 authored by Assembly Member Bob Wieckowski.  As introduced, this bill was intended to address the perceived problem of the 5% exception to the “market” exception in California’s dissenters’ rights law.  California defines “dissenting shares” in part as shares that “were not immediately prior to the reorganization or short-form merger listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304″.  Cal. Corp. Code § 1300(b)(1).  The idea is that if shares of the company to be acquired are traded in an active trading market, there is no need to protect shareholders by providing dissenters’ rights.  See Report of the Assembly Select Committee on the Revision of the Corporations Code, reprinted in Vol. 4, Appendix A, H. Marsh, Jr., R. Finkle & L. Sonsini, Marsh’s General Corporation Law.  The market exception is not unique to California and can be found in the Model Business Corporation Act (§ 13.02(b)) and the corporations codes of 34 other states, including Delaware (tit.8, § 262(b)), and Nevada (NRS 92A.390(1)).

California added the 5% exception to the market exception in the form of a proviso.  The market exception 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.   The rationale for the 5% exception was that if a significant number of shareholders dissent, there could be a flood of selling shareholders that would reduce the target company’s stock price.  However, the existence of a 5% exception introduces an element of uncertainty.  For example, an acquiring company in a stock merger reorganization may be concerned about the amount of cash that it may be required to pay if dissenters’ rights are triggered.  Thus, it is not unusual to see mergers involving California corporations to be conditioned on the number of dissenting shares not exceeding a specified threshold.

AB 1680, as currently amended, would eliminate the 5% exception to the market exception and replace it with a much broader exception. The result would be to include in the definition of “dissenting shares” 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.

If AB 1680 is enacted, dissenters’ rights would be available in mergers in which the target company shareholders receive cash.  Currently, cash mergers are not be subject to dissenters’ rights unless the 5% exception is triggered.  There seems little reason to mandate the availability of dissenters’ rights when the target company’s shares are trading in the market prior to the reorganization transaction. Nevada, for example, does not except cash mergers from its market exception (NRS (92A.390(3)).

California corporations would not be the only corporations affected by AB 1680 because Corporations Code Section 2115 makes Chapter 13 applicable to “pseudo-foreign” corporations.