Elimination Of Exception's Exception For Listed Companies Is In The Offing

Posted on March 02, 2012 by Keith Paul Bishop

While many were thinking of love on Valentine's Day, Assembly member Bob Wieckowski's thoughts were turned to dissenters' rights; for on that day he introduced AB 1680.  This bill would eliminate an exception to an exception from the definition of "dissenting shares" in Corporations Code Section 1300(b). 

Because dissenters' rights are intended to allow a shareholder the opportunity to obtain the fair market value of her shares in specified corporate transactions if those shares are "dissenting shares".  Excepted from the definition of "dissenting shares" are shares that were not immediately before the reorganization or other triggering transaction listed on a national securities exchange certified by the California Commissioner of Corporations pursuant to Section 25100(o).  The rationale for this exception is that these exchanges provide a liquid market and thus there is no need for dissenters' rights. 

Life is not simple and neither is Section 1300(b).  Even if shares are listed on a certified national securities exchange,  a shareholder's shares may nevertheless not be readily marketable.  Thus, the legislature created two exceptions to the exception.  The first exception obtains when any restriction on transfer (whether imposed by the corporation or by any law or regulation) exists.  The second exception arises when demands for payment are filed with respect to 5% or more of the outstanding shares of that class. 

Assembly member Wieckowski is now proposing to eliminate the second exception.  Thus, shares listed on a certified national securities exchange would not be dissenters' shares unless a restriction on transfer exists.  The effect of the bill would be to reduce the number of circumstances in which dissenters' rights will be available.  Note that to qualify as dissenting shares, shares must also meet the other three conditions set forth in Section 1300(b).

But wait!  There's more.  AB 1680 would also provide that the fair market value shall be the most recent closing price per share prior to the first announcement of the terms of the transaction (rather than the day before the first announcement of the transaction). 

For more background on the significance of the Commissioner's certification of national securities exchanges, see the following posts (n.b. - these are links to prior posts that have not been updated for any subsequent events):

P.S. - "Offing" is a nautical term that denotes the part of a distant sea that is visible from the shore.  Joseph Conrad began Heart of Darkness with this description of the ships at anchor in the Thames: "The sea-reach of the Thames stretched before us like the beginning of an interminable waterway.  In the offing the sea and the sky were welded together without a joint, and in the luminous space the tanned sails of the barges drifting up with the tide seemed to stand still in red clusters of canvas sharply peaked, with gleams of varnished sprits."