Dissenters’ Rights

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