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How-to-say-I-Don't
Manisha Aurora
Tuesday, July 4, 2006
Start-ups working out of garages bought by public listed companies for millions and everyone had a happy ending! Well that’s what the boom days were made up of.

But with the economy not going all gung-ho about start-ups now, there are may be many a twist to the fairy-tale of acquisitions. Often when start-ups reach the next level they go in for second round of venture capital financing or are ready to be acquired. The acquisition can be structured as a reverse triangular merger, sale of assets or a stock exchange. Whatever the method of the reorganization is, at the shareholder level it merely requires a majority vote i.e. 51 percent. So what if there are some naysayers to this reorganization in the corporation?

If you dissented to the corporation being bought over what is your recourse under the law? Appraisal or dissenter statutes are enacted by almost every state, which provides that enable the majority, approved acquisitions to be valid, while providing a fair exit to the dissenters. These statutes protect the minority who may claim that there was a breach of fiduciary duty by the majority shareholders that resulted in a less than fair value being meted out to them. However the minority cannot attack the validity of the merger but merely ensure that the valuation is fair.

Take the case of California for example, the California Corporation Code (section 1300 -1313) states that within 10 days of the transaction which results in a change of control the corporation must mail to each potential dissenter 1) the fair value of the company’s shares one day prior to the day of announcing the transaction which resulted in a change of control 2) a description of the procedure to be followed to exercise the dissenter rights 3) a portion of the dissenter rights statutes. The price stated in that notice is an offer to buy the shares at that price. Well, that’s information overload for you!

Often, when investors get all this information in the mail they really do not know what to do with it. So it goes from the mailbox to the recycle bin!

The next time you are inclined to throw away all the verbose legalese, think again. Well, this is your last chance to exit – if you do not like the new merged company, exercise the offer and object. If you do not like the fair price that they are paying you, then you can petition for an appraisal under the supervision of the Superior court. If you don’t act now then California Corporation Code 1312 (a) acts like a complete bar to challenge a majority approved reorganization, absent evidence that the dissenting shareholders received the information that was required under the statute.

Moreover, you only have a small window of time (say 6 months) after the offer letter is sent by the Corporation to file a suit with the Superior court having jurisdiction. But that does not mean that the dissenting shareholders can be paid to the detriment of the creditors. They are way down in the hierarchy and are paid subordinate to all other creditors. But you still have hope!

But not all’s fair in marriage and merger. You being a yahoo shareholder cannot dissent to say a hypothetical merger of google and yahoo and expect them to entertain you while you yell unfair valuation! That is because dissenting share rights are not available if a liquid market exists on the theory that a dissenting shareholder can cash out by selling the shares. Dissenting shares do not include shares that are listed on a national securities exchange certified by the Commissioner of Corporations or listed on the National Market System of the Nasdaq Stock Market subject to a few exceptions.

So a merger is well a lot like marriage to which you have been invited. And the dissenting shareholder is like a witness to the whole fanfare. But you can always choose not to be a silent spectator. You have discretion to obtain information about the merger during the process. If you object, you need to speak now and exercise your rights or you run the risk of being silent forever.

The author can be contacted at Manisha@chugh.com
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