Dissenters

1
Dissenters Rights

• presentation by
• BARRY METZGER
• Senior Partner
• Coudert Brothers LLP
• OECD Asian Corporate Governance Roundtable
• 12 November 2002

2
Dissenters Rights

• The corporate governance mosaic and the small
  mosaic tile of dissenters rights or appraisal
  rights
• Dissenters rights or appraisal rights are the
  right of a shareholder to have the company redeem
  all shares owned by such shareholder if the
  shareholder did not vote in favor of a merger, a
  sale or exchange of substantially all assets of
  the company, or material and adverse charter
  amendments

3
Dissenters Rights

• A feature of both common law and civil law
  corporate regimes
• Principal elements
• Coverage The types of corporate transactions
  giving rise to dissenters rights
• Procedures The procedures to be followed by
  dissenting shareholders and the company
• Valuation The valuation methodology for
  determining the redemption price

4
Dissenters Rights

• United States Model Business Corporation Act
• Coverage Mergers, sales of substantially all
  corporate assets, amendments to articles of
  incorporation which adversely affect shareholder
  rights (e.g., preferential rights, redemption
  rights, preemptive rights or voting rights), and
  share exchange plans, other than
• sales of all assets for cash, with pro rata
  distribution to shareholders within one year
• mergers in which shareholders do not have a vote
  (e.g., short form parent-subsidiary mergers)

5
Dissenters Rights

• Model Business Corporation Act
• Procedures
• Company notify shareholders of availability of
  dissenters rights with notice of shareholders
  meeting
• Dissenting shareholders must notify company
  before shareholders meeting of intent to exercise
  such rights
• Dissenting shareholders must not vote in favor of
  the proposed corporate action
• If corporate action approved, company notify
  dissenting shareholders of payment demand and
  share deposit procedures
• Dissenting shareholders deposit shares
• Company pays its estimate of the fair value of
  the shares

6
Dissenters Rights

• Model Business Corporation Act
• Procedures
• If dissatisfied with valuation, dissenting
  shareholders make claim for the deficiency
• If not satisfied within 60 days, company must go
  to court for a valuation for all dissenting
  shareholders claiming a deficiency
• Company to bear costs of court proceeding and of
  the court-appointed appraiser
• Valuation
• No valuation methodology specified by statute
• Standard is valuation of the shares
  immediately before the effectiveness of the
  corporate action to which the dissenter objects...

7
Dissenters Rights

• Model Business Corporation Act
• Valuation
• excluding any appreciation or depreciation in
  anticipation of such corporate action unless such
  exclusion would be inequitable
• Exercise of dissenters rights an exclusive
  remedy unless the corporate action is unlawful or
  fraudulent

8
Dissenters Rights

• Republic of Korea
• Coverage Sale of the whole business, acquisition
  of the whole business from another company,
  merger or consolidation, in each case requiring
  shareholders approval
• Procedures Dissenting shareholders prior to the
  shareholders meeting must notify company of their
  objections and demand purchase of their shares
  within 20 days of the meeting approving the
  corporate transaction.
• Valuation Dissenting shareholder and company to
  negotiate the purchase price. If not agree,
  purchase price determined by an accounting expert

9
Dissenters Rights

• Republic of Korea
• Valuation
• If disagree with expert, company or dissenting
  shareholders representing 30 of all dissenting
  shareholders may request court determination of
  the purchase price
• If company shares listed on KSE and company and
  dissenting shareholders not agree on a price,
  price is average of (i) weighted average closing
  prices for the stock for one week, (ii) one month
  and (iii) two months
• If still dissatisfied company or 30 of
  dissenting shareholders can go to Financial
  Supervisory Commission for a determination

10
Dissenters Rights

• German Stock Corporation Act and Law regulating
  Transformation of Companies
• Coverage under any control agreement
  (Beherrschungsvertrag) or profit transfer
  agreement (Gewinnabfuhrungsvertrag) any
  non-controlling shareholder may demand repurchase
  of its shares (for cash or shares of new
  controlling corporation), former shareholders of
  a newly merged company may demand a settlement
  (in shares of the new company), and dissenting
  shareholders may require repurchase of their
  shares upon a merger into another company of a
  different legal form, a company being split or a
  company changing its legal form

11
Dissenters Rights

• German Stock Corporation Act and Law regulating
  Transformation of Companies
• Procedure Various procedures depending upon
  coverage event
• Valuation Fair compensation, either the
  number of shares which would be obtained if the
  two companies merged or compensation taking into
  account the (asset) value ratio between the two
  companies

12
Dissenters Rights

• Common characteristics
• Historical origin in evolution from earlier rules
  requiring unanimous consent for major corporate
  changes such as mergers
• Defeated expectations allowing a cash out where
  a fundamental change occurs in the original
  business
• Protection in transactions with high inherent
  risk of the unfair treatment of minority
  shareholders

13
Dissenters Rights

• Common characteristics
• Role as a constraint on management in major
  corporate restructuring transactions, if the cost
  of meeting demands of dissenting shareholders is
  (too) high

14
Dissenters Rights

• Observations
• Historic origins with strong inherent logic and
  persistence
• Concern over effectiveness of the remedy and, in
  particular, over dissenting shareholders ability
  to use the remedy
• Recognition that other remedies to challenge
  unfair transactions may be ineffective in the
  circumstances
• A remedy applied in a limited range of
  transactions, but an important protection of
  minority shareholder rights in those situations