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Chapter 7 Dissenters’ Appraisal Rights

Chapter 7 Dissenters’ Appraisal Rights. Majority Rules of Company —Flexibility to adjust to new situation, avoiding minority’s block —Risks opportunism by the majority (1) Freezeouts : Strategy of Attribution remove minority from office, no-dividend policy

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Chapter 7 Dissenters’ Appraisal Rights

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  1. Chapter 7 Dissenters’ Appraisal Rights • Majority Rules of Company —Flexibility to adjust to new situation, avoiding minority’s block —Risks opportunism by the majority (1) Freezeouts: Strategy of Attribution remove minority from office, no-dividend policy (2) Forceouts: Manipulate the fundamental structure of the corporation. Self-dealing with affiliated company

  2. Dissenters’ Appraisal Rights • Appraisal rights giving liquidity rights to dissenters who “opt out” of majority rule in some fundamental transactions. • Balance Scheme —Resolution shall be made by a rule —the interests of minority shall be protected For those reasons, only a small number of fundamental changes could trigger the appraisal rights.

  3. Dissenters’ Appraisal Rights The Rules Comparison between US & China 1.Triggers for dissenters’ rights （1）Merger, consolidation MBCA §13.02(a)(1), (a)(2)：Merger, Consolidation or compulsory share exchange. But shareholders of acquiring corporation are not entitled to appraisal rights. Del. GCL §262 (b)：All shareholders in a merger or consolidation are entitled to appraisal. Company Law in China : Art. 75, 143(4)

  4. Dissenters’ Appraisal Rights (2) “Short form” merger Shareholders squeezed out in a “short form” (parent-subsidiary) merger have dissenters’ rights. MBCA §13.02 (a)(2) Del. GCL §262 (b) Company Law in China: Art. 75 (stipulated generally) (3) Sale of assets MBCA §13.02 (a)(3) Del. GCL §262 (c) only if provided in charter Company Law in China : Art. 75 (4) Charter amendment MBCA §13.02 (a)(4) Del. GCL §262 (c) only if provided in charter Company Law in China : Art. 75 (3) for subsistence of the company

  5. Dissenters’ Appraisal Rights • 2. Procedures Delaware Procedures a. Preserve right to appraisal Before the meeting, the corporation sends shareholders notice of appraisal rights. Then shareholders give the written notice of their intent. Shareholder vote against or at least not vote for the proposed change. b. Exercise right to appraisal After the effective date of the fundamental change, the corporation must notify shareholders of appraisal rights. Within a specified number of days, dissenters must accept the terms of change or tender shares to corporation and demand payment. C. Appraisal action Dissenters must then bring an appraisal action in court and initially bear all litigation fees and expenses (such as attorney and expert fees)

  6. Dissenters’ Appraisal Rights • MBCA procedures: pro-realistic option a. dissenters preserve dissenter’s right, demand payment b. the corporation must promptly pay the dissenter the corporation’s estimate of fair value. C. the corporation must attempt to settle any asserted shortfall. d. court appraisal only if the shareholder considers the corporation’s payment to be inadequate and negotiations fail. if the dissenter’s payment demand remains unsettled for 60 days, the corporation must commence a judicial appraisal proceeding.

  7. Dissenters’ Appraisal Rights • Chinese Procedures a. vote against the proposed change b. negotiate the fair price with the company within 60 days from the resolution c. dissenters file a lawsuit within 90 days from the resolution

  8. Dissenters’ Appraisal Rights • Fair Value Generally, valuation does not take the effect of the fundamental change into account when assigning share value. Valuation based on past performance Valuation based on future earnings

  9. Dissenters’ Appraisal Rights Valuation based on past performance -Market price: if shares are public traded, or they could have been sold to a willing buyer. In case of thinly traded shares, less weight is given to that. -Past earnings: “investment value”, measure the earning capacity of the corporation based on its previous earnings record. Average annual earnings are computed and then capitalized by applying a multiplier. -Book value: the excess of historical-valued assets over liabilities, does not reflect the on-going earnings of business. Courts use it only when valuation based on earnings is unreliable. -Liquidating value: amount for which the company’s assets could be sold for cash, failing to take into account the on-going values. -Going-concern value: combine all the elements reasonably related to value.

  10. Dissenters’ Appraisal Rights • Going-concern value: Delaware courts used a “block method” : the appraiser assigned an arbitrary weight to various values and then added them to get a weighted value. Type of Valuation Appraisal Weight Given Amount Asset Value $ 100 45% $45.00 Earning Value $ 120 40% $ 48.00 Market Price $ 75 15% $ 11.25 Fair Value $ 104.25

  11. Dissenters’ Appraisal Rights • Valuation based on future earnings Shares are valuable because they represent a promise of future income, so the Delaware Supreme Court held that the “block” method would no longer be exclusive. The most widely used method of valuation in the financial community is discounted cash flow. Under this method, the present value of expected future cash flows is calculated using a discount rate to take into account the time value of the money.

  12. Dissenters’ Appraisal Rights Earnings Probability Expected Value (Million) (%) （Million） Scenario#1 $0 10% $0.00 Scenario#2 $10 50% $5.00 Scenario#3 $20 40% $8.00 Total Expected Value $13.0

  13. Dissenters’ Appraisal Rights • If we assume the firm’s expected earnings of $13.0 million per year will continue into the foreseeable future, it is possible to calculate the value of this cash flow. • If the interest rate on no-risk, long-term US government bonds is 5%, the discounted value of the firm’s cash flow is $260. (Unknown * 5% = $13.0 million ) • That is , an investor would be willing to pay $ 260 million today for the firm’s cash flow stream because the risk-free alternative——investing the same amount in US government bonds——would produce $13.0 million annually.

  14. Shareholders’ Appraisal Rights • Article 75 • Under any of the following circumstances, shareholders who cast an opposing vote to a resolution passed by the shareholders’ meeting may request that the company acquire their equity interests based on a fair price: (1) the company has not made a profit distribution to the shareholders for five consecutive years although the company has been profitable for those five consecutive years and satisfy profit distribution requirements stipulated in this Law; (2) merger, division and transfer of main assets of the company; or

  15. Shareholders’ Appraisal Rights • (3) expiry of the term of business operations stipulated in the articles of association of the company or the occurrence of a trigger event for dissolution stipulated in the articles of association or the passing of a resolution by a shareholders’ meeting to amend the articles of association for subsistence of the company. • Where the shareholders fail to conclude an agreement for acquisition of equity interests within 60 days from the date of the resolution by the shareholders’ meeting, the shareholders may file a lawsuit with a people’s court within 90 days from the date of the resolution of the shareholders’ meeting.

  16. Par Value of Shares • Article 126 The capital of a company limited by shares is divided into shares of equal par value. Article 127 The terms and price shall be the same for all shares of the same type in a share issue. An organization or individual shall pay the same price for each share subscribed. Article 128 Shares may be issued at the par value or at a premium but shall not be issued below par value.

  17. Two Forms of Shares • Article 130 Shares issued by a company may be in the form of registered shares or bearer shares. Shares issued by a company to promoters or legal persons shall take the form of registered shares and the share certificates shall state the name of the promoter or legal person and shall not state another name or the name of a representative.

  18. Transfer of Registered Shares • Article 140 Transfer of registered shares shall be made by shareholders by way of endorsement or other methods stipulated by laws and administrative regulations; the company shall record the name and address of the transferee in the register of shareholders upon the transfer. Alteration of records in the register of shareholders shall not be made within 20 days before the convening of a shareholders’ general meeting orwithin five days from the record date for determination of dividend distribution by the company.

  19. Transfer of Bearer Shares • Article 141 Transfer of bearer shares shall take effect upon delivery of the share certificate by the shareholder to the transferee. But for listed companies, e-transaction of shares does work.

  20. Limitation on Transfer of Shares of Promoters • Article 142 (Section 1) Shares held by promoters shall not be transferred within one year from the date of incorporation of the company. Shares issued by the company before the share public offering shall not be transferred within one year from the date on which the shares of the company are listed on a stock exchange.

  21. Limitation on Transfer of Shares of Managers • Article 142 (Section 2) Directors, supervisors and senior management personnel of a company shall declare their shareholding in the company and changes in such shareholding to the company; and shall not transfer more than 25% of their shareholding in the company during their term of appointment or transfer their shares within one year from the date on which the shares of the company are listed on a stock exchange. (to be continued)

  22. Limitation on Transfer of Shares of Managers • The aforesaid persons shall not transfer their shares in the company within half a year after leaving their post. The articles of association of the company may make restrictive provisions on transfer of shares of the company held by directors, supervisors and senior management personnel.

  23. Limitation on Shares-Repurchase of Company Article 143 Companies shall not repurchase shares, except under any of the following circumstances: (1) reduction of registered capital of the company; (2) merger with another company which holds shares of the company; (3) distribution of shares to employees as an incentive; and (4) request from shareholders who object to a resolution of a shareholders’ general meeting on merger or division of the company for the company to acquire their shares.

  24. Board of directors • 1. Generally: the mechanics of the board of directors, including: (1) how the board is elected; (2) how it holds its meetings; (3) what formalities it must observe; (4) how it may make use of committees. We would discuss the rules of board with Sino-US comparison perspective .

  25. Board of directors • 2.Election of board members: • (1) Generally, directors are elected by shareholders, with the possible exception of the filling of vacancies. • (2) Normally, a director’s term is one year (in US, but different in China), and entire board stands for re-election at the annual meeting of shareholders. • (3)Pre-condition for a valid vote on the Election of board member • a. Notification; b. Quorum.

  26. Board of directors • (4) Straight vs. cumulative voting • Definition of “straight” voting: each share may be voted for as many candidates as there are slots on the board, but no shares may be voted more than once for any given candidate. • Example: a closely-held corporation. A and B are sole shareholders. A holds 72 shares, and B holds 28 shares. • A1 B1 • A2 B2 • A3 B3

  27. Board of directors • Assume that A holds 51 shares and B holds 49 shares, straight voting may produce unfair result. • To remedy this inadequate representation of minority shareholders, the device of cumulative voting was invented. • Cumulative voting: Entitles a shareholder to cumulate or aggregate his votes in favor of fewer candidates than there are slots available, including in the extreme case aggregating all his votes for just one candidate. • Refer to the case of previous page.

  28. Board of directors • 1. Formula: S/(D+1)+1 • minimum number of share needed to elect one director under cumulative voting. • S=total number of shares voting • D=the number of directors to be elected • 2. Mandatory of permissive cumulative voting • (1) Mandatory: A few states • (2) Permissive: • a. “Opt out” election: unless article explicitly exclude it. • b. “Opt in ” election: specifically elect to have it

  29. Board of directors • 3. Trickiness: It can be catastrophic to A to use straight voting when, unbeknown to him, B is using cumulative voting. • Example: A owns 60 shares, B own 40 shares. A casts 60 votes for A1, A2, A3,A4 and A5 each. B allocate his votes as follows: B1-68, B2-67 and B3-65 (with nothing for a fourth or fifth candidate). Result: B ends up controlling the board!

  30. Board of directors in China • The Composition of the Board (Art. 45, 51) • The Chairman of the Board (Art. 45) • The Terms of the Board (Art.46) • The Authorities of the Board (Art. 47) • The Convening of the Board (Art. 48) • The Voting Procedure of the Board (Art. 49)

  31. Board of directors in China • Article 45(section 1) The board of directors established by a limited liability company shall comprise 3 up to 13 members, unlessit is otherwise provided for in Article 51 of this Law. • If a limited liability company is established by 2 or more state-funded enterprises or other state-funded investors, the board of directors shallcomprise the representatives of employees of this company.

  32. Board of directors in China • The board of directors of any other limited liability company may also comprise the representatives of employees of the company concerned. • The employees' representatives who are to serve as the board of directors shall be democratically elected by the employees of the company through the general meeting of the employees’ representatives, employees' meeting of the company or in any other way.

  33. Board of directors in China • Article 51 As for a limited liability company with relatively less shareholders or with relatively small scale, it may have an acting director and no board of directors. The acting director may concurrently hold the post of the company's manger.

  34. Board of directors • Article 45(section 2) The board of directors shall have one board chairman and may have one or more deputy chairman. The appointment of the chairman and deputy chairman shall be prescribed in the articles of association.

  35. Board of directors • Article 46 The terms of office of the directors shall be provided for in the articles of association, but each term of office shall not exceed 3 years. The directors may, after the expiry of their term of office, hold a consecutive term upon re-election. • Ifno reelection is timely carried out after the expiry of the term of office of the directors, or if the number of the members of the board of directors is less than the quorum due to the resignation of some directors from the board of directors prior to the expiry of their term of office, the original directors shall, before the newly elected directors assume their posts, exercise the authorities of the directors according to laws, administrative regulations as well as the articles of association.

  36. Board of directors • Article 47The board of directors shall be responsible for the shareholders' meeting and exercise the following authorities: (1)convening shareholders' meetings and reporting the status on work thereto; (2)carrying out the resolutions made at the shareholders' meetings; (3)determining the operation plans and investment plans; (4)working out the company's annual financial budget plans and final account plans; (5)working out the company's profit distribution plans and loss recovery plans;

  37. Board of directors (6)working out the company's plans on the increase or decrease of registered capital, as well as on the issuance of corporate bonds; (7)working out the company's plans on merger, split-up, change of the company form, dissolution, and etc.; (8)making decisions on the establishment of the company's internal management departments; (9)making decisions on hiring or dismissing the company's manager and his remuneration, and, according to the nomination of the manager, deciding on the hiring or dismissing of vice manager(s) and the person in charge of finance as well as their remuneration; (10)working out the company's basic management system; and (11) other functions as prescribed in the articles of association.

  38. Board of directors • Article 48 The meeting of the board of directors shall be convened and presided over by the chairman of the board of directors. • Ifthe chairman of the board of directors is unable or does not perform his duties, the meeting may be convened or presided over by the deputy chairman of the board of directors. • Ifthe deputy chairman of the board of directors is unable or does not perform his duties, the meeting may be convened or presided over by a director jointly recommended by half or more of the directors.

  39. Board of directors • Article 49 The discussion methods and voting procedures of the board of directors shall be prescribed by the articles of association, unless it is otherwise provided for by this Law. • The board of directors shall make records of the decisions on the matters discussed at the meetings thereof. The directors who attend the meeting shall affix their signatures to the records. • In the voting on a resolution of the board of directors, one person shall have one vote. • Case:One company has 8 directorships.

  40. Manager of LLC • Appointment and Dismissal (Art. 50) • Authorities (Art. 50) • The Acting Director can Take the Post of Manager (Art. 51)

  41. Article 50 A limited liability company may have a manager who shall be hired or dismissed upon the decision of the board of directors. • The manager shall be responsible for the board of directors.

  42. Article 50 The manager shall exercise the following authorities: (1)taking charge of the management of the production and business operations of the company, and organizing to implement the resolutions of the board of directors; (2)organizing the execution of the company's annual operational plans and investment plans; (3)drafting plans on the establishment of the company's internal management departments; (4)drafting the company's basic management system; (5)formulating the company's concrete bylaws;

  43. (6)proposing to hire or dismiss the company's vice manager(s) and person(s) in charge of finance; (7)deciding on the hiring or dismissing of the persons-in-charge other than those who shall be decided by the board of directors; and (8) other authorities conferred by the board of directors. • If the articles of association prescribe otherwise the authorities of managers, the provisions in the articles of association shall be followed. • The manager attends the meetings of the board of directors as a non-voting delegate.

  44. Article 51 As for a limited liability company with relatively less shareholders or with relatively small scale, it may have an acting director and no board of directors. The acting director may concurrently hold the post of the company's manger. • The authorities of the acting director shall be prescribed in the articles of association.

  45. Supervisory Board • The Composition: No. 1-3 or 1 executive member for small company ( Art. 52) • The Ratio of Representative from ——Shareholders and Employees • The Chairman of Supervisory Board: ½ • The Convening of the Meeting • The Terms of Supervisory Board: 3 years • The Authorities of Supervisory Board • The Expenses Burden of Supervision • The Working and Voting Procedure

  46. Supervisory Board • Article 52(section 1) A limited liability company may set up a board of supervisors, which shall comprise at least 3 persons. • A limited liability company, which has relatively less shareholders or is relatively small in scale, may have 1 or 2 supervisors, and does not have to establish a board of supervisors.

  47. Supervisory Board • Article 52(section 2) The board of supervisors shall include representatives of shareholders and representatives of the employees of the company at an appropriate ratio which shall be specifically stimulated in the articles of association. • The employees' representatives, who are to serve as members of the board of supervisors, shall be democratically elected by the employees of the company through the meeting of the employees' representatives or employees' meeting, or by any other means.

  48. Supervisory Board • Article 52(section 3)The board of supervisors shall have one chairman, who shall be elected by half or more of all the supervisors. • The chairman of the board of supervisors shall convene and preside over the meetings of the board of supervisors. • If the chairman of the board of supervisors is unable to or does not perform his duties, the supervisor recommended by half or more of the supervisors shall convene and preside over the meetings of the board of supervisors. • Article 52(section 4)No director or senior manager may concurrently work as a supervisor.

  49. Supervisory Board • Article 53Every term of office of the supervisors shall be 3 years. The supervisors may, after the expiry of their term of office, hold a consecutive term upon re-election. • If no reelection is timely carried out after the expiry of the term of office of the supervisors, or if the number of the members of the board of directors is less than the quorum due to the resignation of some directors from the board of supervisors prior to the expiry of their term of office, the original supervisors shall, before the newly elected supervisors assume their posts, exercise the authorities of the supervisors according to laws, administrative regulations as well as the articles of association.

  50. Supervisory Board • Article 54 The board of supervisors or supervisor of a company with no board of supervisors may exercise the following authorities: (1) checking the financial affairs of the company; (2)supervising the duty-related acts of the directors and senior managers, and bringing forward proposals on the removal of any director or senior manager who violates any law, administrative regulation, the articles of association or any resolution of the shareholders' meeting; (3)demanding any director or senior manager to make corrections if his act has injured the interests of the company;

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