Law Change Paves the Way for Faster Corporate Reorganizations
An amendment to the California Corporations Code that eliminates the waiting period for certain reorganizations approved by less than unanimous written consent promotes efficiency for businesses, providing flexibility without compromising existing legal shareholder protections.
AB 457 (Torres) amended Section 603(b) of the California Corporations Code concerning shareholder action taken by written consent to approve reorganizations as to which shareholders have dissenters' rights. The new law became effective on January 1.
Under prior law, a 10-day waiting period must have lapsed before consummation of reorganizations approved by less than unanimous written consent, unless the written consent of all shareholders was solicited. The prior law delayed the closing of transactions that were properly approved by a corporation's board of directors and shareholders and subjected transactions to consummation risks without corresponding benefit to shareholders. For example, circumstances might have developed within the 10-day period that would have resulted in loss of financing or otherwise impacted closing conditions.
The threshold question for any legislation is whether it is necessary to address a substantive problem. Some contended the amendment was unnecessary for a variety of reasons, including the fact that the 10-day waiting period can be avoided simply by soliciting the written consent of all shareholders. However, soliciting the consent of all shareholders comes with increased costs, including the expense of preparing, printing and mailing solicitation materials, as well as attorneys' fees. These costs are unnecessary and inefficient, particularly given that often a corporation will solicit the consent of all shareholders, obtain the required majority consent within a day or two, and close the transaction promptly after receiving the necessary approval. In many cases, this process is completed before the costly consent solicitation materials have arrived by mail to each shareholder.
Other opponents of the amendment asserted that the 10-day waiting period was necessary to protect shareholders by allowing them a period of time to seek an injunction. This argument was without merit because Code Section 1312(a) expressly prohibits shareholders with dissenters' rights from attacking the validity of a corporate reorganization. Professor Harold Marsh commented that this section "was intended to and does prohibit any suit for an injunction to stop the merger, since its major purpose was to take away from the shareholder this 'blackmail' threat to hold up the merger indefinitely while the suit was litigated." In addition to dissenters' rights, aggrieved shareholders continue to have direct recourse against directors for breach of fiduciary duties.
Further, there are confidentiality risks associated with soliciting the consent of all shareholders. The more people are aware of a private transaction, the greater the possibility of leakage of confidential information. When a target company solicits the consent of all shareholders, a strategic transaction may become widely known within the industry. Competitors may do well to thwart the acquisition. If the transaction does not close due to failure of a closing condition (e.g., lawsuits, absence of required consents), the target company might be viewed as damaged goods within the industry, or the would-be acquirer may walk away with confidential information about the target company, all of which are harmful to the target company and its shareholders.
The way the former law was written forced corporations to incur increased costs and incremental risks without legitimate justification. The new Section 603(b) eliminates the 10-day waiting period before consummation of reorganizations approved by written consent regardless of whether the consent was unanimous. However, the waiting period continues to apply to consummation of actions where there are not adequate shareholder protections (e.g., approval of conflict of interest transactions under Code Section 310 and approval of indemnification payments under Code Section 317). Therefore, the new law furthers the goals of the legislature in authorizing shareholder action by written consent: it promotes efficiency and provides flexibility to corporations without impairing shareholder protection afforded by other existing laws.
How can the new law be used to advantage in practice? Rather than having only two alternatives—soliciting the written consent of all shareholders or waiting 10 days to close the merger—California corporations now have the third alternative of obtaining majority approval by written consent and immediately closing the merger.
While the third alternative can certainly simplify and streamline the process while cutting off deal risk, it may not be the best choice in all transactions. Some clients may prefer to provide identical information to all shareholders as a matter of full disclosure and fairness, and others may even choose to wait for a period of time after circulating consent materials before completing the merger.
More generally, some corporations may prefer to avoid the consent process entirely and approve the transaction at a special meeting, where real-time communication can occur and the merger can be completed promptly upon approval.
In the end, the new law provides greater flexibility for corporations to approve fundamental transactions in accordance with their own culture while providing a tool to eliminate the risks inherent in a mandatory 10-day waiting period.
Reprinted with permission from the March 10, 2014 issue of The Recorder. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.