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California's Obscure Regulation of Share Exchange Tender Offers

In 1989, the California legislature decided to define "share exchange tender offer" in the General Corporation Law.  Section 183.5 defines the term to mean:

"any acquisition by one corporation in exchange in whole or in part for its equity securities (or the equity securities of a corporation which is in control of the acquiring corporation) of shares of another corporation, other than an exchange reorganization (subdivision (b) of Section 181)."

This quite leads to the question of how does a "share exchange tender offer" differ from an "exchange reorganization"?  Both involve an acquisition of equity securities of one corporation in exchange for equity securities of another corporation.  The immediate consequence of an "exchange reorganization" is the acquisition of control.  Thus, a "share exchange tender offer" is an exchange in which the acquiring corporation does not acquire control.

But why make such a recherche distinction?  The reason can be found in Section 1201.5 which the legislature added to the GCl at the same time.  That statute requires the principal terms of a "share exchange offer" to be approved by the the outstanding shares of each class of the corporation making the tender offer or whose shares are to be used in the tender offer.  This shareholder approval requirement is subject to an exception that limits the shareholder approval requirement significantly.  Look for a discussion of the exception in tomorrow's post.

Section 1201 already imposed a shareholder approval requirement when the legislature added Sections 183.5 and 1201.5.  So why aren't these two statutes mere surplusage?  The reason was that Section 1201 applies to reorganizations, as defined in Section 181.  A "share exchange tender offer" by definition is not a "reorganization" and hence was not subject to Section 1201.  For the same reason, shareholders of an acquiring corporation do not enjoy dissenters' rights in a "share exchange tender offer". Marsh's California Corporation Law § 19.04[B] provides some additional historical background on the change.

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