After a Merger_ Bar Is Higher for Dissenters to Challenge It by accinent


                                                                                                                                                     MARCH 23, 2006
                                                                                         Official Newspaper of the San Francisco Superior Court and United States Northern District Court
                                                                 Since 1893

After a Merger, Bar Is Higher for Dissenters to Challenge It
By Thomas C. Klein                               mail to each potential dissenting share-               dissenters’ rights statute. Principally, the
                                                 holder: 1) a statement of the fair market              plaintiffs asserted that the corporation failed

M      inority shareholders objecting to
       the acquisition of their corporation
may dissent from the acquisition and have
                                                 value of dissenting shares determined by
                                                 the corporation as of the day before the first
                                                 announcement of the proposed reorgani-
                                                                                                        to inform them of the corporation’s
                                                                                                        responsibility to state a fair market value
                                                                                                        for dissenting shares and that such stated
their shares bought out for fair value. Every    zation, excluding any change in value in               value would constitute an offer to purchase
state has adopted some form of statutory         consequence of the proposed transaction                such dissenting shares at that price.
appraisal procedure for determining the fair     itself; 2) a brief description of the procedure
value of dissenting shareholders’ shares.
Historically, the consent of every share-
holder was required to effect an acquisition
                                                 to be followed to exercise dissenters’ rights;
                                                 and 3) copies of certain portions of the
                                                 dissenters’ rights statute. The statement of
                                                                                                        F   urthermore, the plaintiffs alleged that
                                                                                                            the defendant fiduciaries breached their
                                                                                                        fiduciary duty by omitting the statement
of a corporation. This unanimity require-        fair market value sent to these shareholders           of fair value and by stating that dissenting
ment often impeded many value-enhancing          constitutes an offer by the corporation to             shareholders had to make a demand on the
transactions because a determined, and           buy the dissenting shares at that price. If the        corporation to purchase their shares
sometimes unreasonable, minority of              dissenters disagree with the price offered,            without the corporation having provided
shareholders could thwart the will of the        they can petition for an appraisal procedure           any price to the shareholders. The plaintiffs
majority. Appraisal or dissenters’ rights        overseen by the proper California Superior             also claimed that the defendants breached
statutes were adopted to enable acquisitions     Court.                                                 their fiduciary duty by concealing
approved by a majority of the corporation’s         In the recent case of Singhania v.                  information and documents essential to
shareholders while providing fair value to       Uttarwar, 2006 DJDAR 1478 (Feb. 3, 2006),              plaintiffs’ decision of whether to exercise
the minority shareholders opposed to the         the California Court of Appeal addressed               their dissenters’ rights.
merger.                                          whether the appraisal remedy of the                       The merged company and U.S. Interactive
   These statutes provide protection to          California dissenters’ rights statute was the          filed for bankruptcy protection from
minority shareholders who not only might         exclusive remedy after a reorganization for            creditors sometime after the merger. Claims
disagree with the merger but also might          a shareholder who alleges misrepresentation            against Soft Plus and U.S. Interactive did
believe that conflicts of interest or other      by the corporation and corporate insiders              not survive the bankruptcy. Accordingly,
breaches of fiduciary duty resulted in a         regarding the dissenters’ rights process and           the plaintiffs sought a remedy from the
lower than fair value price for shares in a      concealment of information that might be               former Soft Plus fiduciaries. The plaintiffs’
merger. Consistent with the policy of            useful to a shareholder in deciding whether            complaint in the trial court was dismissed
enabling majority-approved acquisition           to dissent from an acquisition. The question           multiple times with leave to amend, and
transactions, these statutes also typically      before the Court of Appeal was whether the             ultimately the fourth amended complaint
insulate the merger transaction from attacks     appraisal remedy acted as a bar to post-               was dismissed by the trial court on an order
on its validity by the minority shareholders.    merger challenges to the acquisition, even             sustaining the defendant’s demurrer.
California’s dissenters’ rights statute,         if such challenges were asserted against                  On the plaintiffs’ appeal, the Court of
California Corporations Code, Sections           individual corporation fiduciaries —                   Appeal examined what it termed the
1300-1313, states that no shareholder who        directors, officers and majority shareholders.         “statutory bar” to post-acquisition claims
has dissenters’ rights can attack the validity      In Singhania, the plaintiffs — a group of           in Section 1312(a) of the California
of the acquisition except to test whether        former minority shareholders and former                Corporations Code, which prohibits post-
the proper vote was obtained to approve          employees of Soft Plus Inc., a California              reorganization attacks on the validity of a
the transaction.                                 corporation that was merged into a                     reorganization on the theory that dissenting
   The California dissenters’ rights statute     subsidiary of then-publicly traded U.S.                shareholders have the appraisal remedy, and
provides that within 10 days after               Interactive Inc. — alleged that the                    in any such proceeding a dissenting
the approval of a transaction changing           information soliciting approval of the                 shareholder can prove that he or she is
the control of the corporation (and              merger transaction disseminated by Soft                entitled to a higher price because of any
certain asset sale transactions) — called        Plus to its shareholders failed to contain             number of factors, including breaches of
“reorganizations” — the corporation must         the information required by the California             fiduciary duty. The Court of Appeal cited
as authority the California Supreme Court         The Court of Appeal noted that all             merger when deciding whether to exercise
decision of Steinberg v. Amplica, 42 Cal.3d     shareholders of Soft Plus received an            their dissenters’ rights. Accordingly, the
1198 (Dec. 31, 1986, as modified Feb. 11,       information statement detailing the terms        Court of Appeal concluded that Section
1987), which held that where a plaintiff is     of the acquisition, the approval process for     1312(a) acts as a bar to a post-acquisition
aware of all the facts underlying a claim       the acquisition, the merger consideration        claim that fiduciaries concealed certain
for breach of fiduciary duty before the         to be paid to the shareholders and, among        information when the corporation had no
merger but refrained from filing the action     other information, a statement of the            statutory duty to provide such infor-
for damages until after the merger was          procedure the shareholders needed to             mation.
completed, Section 1312(a) acts as a bar to     follow to exercise their dissenters’ rights.        The court nevertheless made clear that
such suit. The Steinberg court reasoned that    In addition, Soft Plus included a copy of        Section 1312(a) may not bar an action
a plaintiff aware of the facts of a breach of   the relevant statutory dissenters’ rights        for a fraud or a breach of fiduciary duty
fiduciary pre-acquisition should bring her      provisions of California law. The court          that causes a shareholder to go along with
claims in the appraisal process and if the      determined that any procedural infraction        a reorganization based upon misinfor-
price of the stock is artificially deflated     by Soft Plus was negated by Soft Plus’           mation or nondisclosures material to a
because of the breach of fiduciary duty, then   providing the shareholders with a copy           decision about exercising dissenters’
the plaintiff can seek full value and be        of the dissenters’ rights statute setting out    rights.
cashed out in the appraisal process.            the applicable statutory provisions                 However, absent evidence that the
   The plaintiffs in Singhania strove to        for exercising their dissenters’ rights, not-    plaintiffs lacked material information to
distinguish the facts of their case from        withstanding the corporation’s failure to        which they were entitled, the court
that of Steinberg, alleging that they were      state a fair market value price.                 reasoned that Section 1312(a) should bar
not aware of all of the facts of the breach                                                      claims that are ultimately just about fair
of fiduciary duty because the corporation
withheld documents and information that
would have assisted the plaintiffs in
                                                W      ith regard to the claim of with-
                                                       holding information, the court found
                                                that Soft Plus was not obliged to provide
                                                                                                 value, which can be best adjudicated in
                                                                                                 an appraisal process. The Section 1312(a)
                                                                                                 bar thus supports a policy articulated by
deciding whether to exercise their appraisal    any information requested by the plaintiffs      Justice Stanley Mosk in Steinberg,
remedy. The plaintiffs argued that they         beyond that to which they were entitled          namely to enable “the consummation of
were damaged by a procedural infraction         under the shareholder information pro-           mergers benefiting the majority and the
committed by Soft Plus for not including        visions of Sections 1600 and 1601 of the         corporation as a whole ... [and limiting]
the statement of fair market value as well      California Corporations Code.                    the prospect of personal liability of those
as a substantive breach of duty and fraud         Therefore, the plaintiffs had a means          who arranged the merger, including
by the fiduciaries withholding information      to obtain the information they claim             liability for punitive damages, that would
and thereby precluding the shareholders         they lacked and they could have obtained         be a powerful disincentive to legitimate
from making a timely or informed decision       such information within the time period          mergers.”
to participate in the merger. The plaintiffs    for exercise of the dissenters’ rights.
asserted that Steinberg does not apply          Furthermore, the court noted that share-         Thomas C. Klein is a partner in the Palo
because they were not aware of all the facts    holders do not have an enhanced right to         Alto office of Wilson Sonsini Goodrich &
that were withheld.                             corporate records or information in a            Rosati.

             Reprinted with permission from the San Francisco Daily Journal. ©2006 Daily Journal Corporation. All rights reserved.
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