Something Is Missing From Section 1203

Allen Matkins

Allen Matkins

In 1988, the California legislature enacted a unique fairness opinion requirement for certain "interested party" tender offers, including a share exchange tender offers (Section 183.5) or written proposals for a written a "reorganization" or sale of assets.  Cal. Corp. Code § 1203, 1988 Cal. Stats. ch. 265.  This requirement applies to California corporations as well as foreign corporations that are subject to Section 2115 of the California Corporations Code.  See California's Fairness Opinion Requirement For Interested Party Proposals.

The fairness opinion requirement in Section 1203(a) does not apply to an interested party tender offer or proposal if the transaction has been qualified under Section 25113 or 25121 of the Corporations Code.   However, this exclusion does not make much sense in the case of a cash tender offer or cash-out merger.  As explained in Section 19.06 of Marsh, Finkle & Bishop, Marsh's  California Corporation Law:

The only way in which the Commissioner of Financial Protection & Innovation would be involved in such a transaction is under the provisions of Section 1101.1 of the Corporations Code, which provides an “escape valve” from the prohibition of Section 1101 against the cash-out of minority shareholders by a parent corporation owning more than 50% but less than 90% of the shares of a subsidiary (see Section 19.05, above).  Under Section 1101.1, the Commissioner is authorized to approve “the terms and conditions of the transaction and the fairness of such terms and conditions,” in which case the prohibition against the cash-out of the minority shareholders does not apply.  Presumably, such a determination by the Commissioner should be a more-than-adequate substitute for the opinion of an investment banker that the transaction is fair.  However, that approval is granted under Section 25142 of the Corporate Securities Law.  Furthermore, no mention is made of the similar approval which may be granted by the Insurance Commissioner or the Public Utilities Commission under the provisions of the same Section 1101.1.  To make this provision make any sense, a new “clean-up bill” will be required.

Note that the exclusion does not apply to Subdivision (b) of Section 1203 which imposes additional requirements if a later proposal is received. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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