Changes to the longstanding dissenters’ rights regime are on tap this fall for North Carolina corporations. With Session Law 2011-347, the North Carolina General Assembly adjusts the standards for which shares have appraisal rights; the corporate actions that trigger appraisal rights; and certain elements of appraisal demand procedures affecting the responsibilities of shareholders and corporations alike. The bill takes effect on October 1, 2011.
With a few departures, the changes follow the most recent iteration of the Model Business Corporation Act (the “Model Act”). The amendments seek to simplify and clarify appraisal proceedings, better defining the circumstances giving rise to appraisal while improving the chances that appraisal will function properly when warranted. Discussed below are some of the notable changes to current law produced by the bill.
Shares Eligible for Appraisal
The bill makes several adjustments to the appraisal eligibility of any class or series of shares:
- Voting Shares Only: The bill generally limits appraisal rights to only those shares entitled to vote on a long-form merger, share exchange, or extraordinary asset disposition, a restriction not seen in present law or the Model Act. The change will affect only new shares, however; the bill includes a grandfather clause preserving appraisal rights for non-voting shares issued and outstanding on the effective date of the act.
- Market Exception: Shares with liquidity—without forced appraisal—remain excluded from appraisal rights, but the bill makes significant adjustments to the reach of this “market exception.” It first clarifies which shares qualify for the market exception by: (i) referring to the federal Securities Act of 1933 to define shares traded on a reliable exchange; imposing a new $20 million market value threshold for classes of shares traded in other organized markets and held by 2,000 shareholders; and (ii) adding a new category of shares issued by a registered open end management investment company that are redeemable at net asset value by the holder. It also expands the categories of corporate actions subject to the market exception, adding charter amendments and conversions to foreign status or unincorporated status to the existing categories of mergers, share exchanges and asset dispositions. Finally, the bill restricts the market exception and restores appraisal rights to any shares affected by an interested transaction, which the bill broadly defines to capture the acquisition or exchange of shares or corporate assets, under certain circumstances, by a controlling shareholder, its affiliate, a senior executive, or a director of the corporation.
- Private Ordering for Preferred Shares: The bill broadly permits private ordering of any or all appraisal rights of preferred shares, with respect to any corporate action. A corporation may eliminate preferred shares’ appraisal rights by a provision in its articles of incorporation, but the bill seeks to curb abuse of the option by making any such charter amendment ineffective against corporate actions taken within a year of the amendment’s effective date.
Corporate Actions Creating Appraisal Rights
The bill also changes the list of corporate actions giving rise to automatic appraisal rights, expanding the list by adding three new categories of corporate conversions: (1) conversion to a foreign corporation, if the shareholder does not receive equivalent shares and a proportionate voting interest in the foreign corporation; (2) conversion to nonprofit status; and (3) conversion to unincorporated status. These conversions create appraisal rights regardless of the voting status of the affected shares.
On the other hand, the bill eliminates a number of charter amendments that create appraisal rights under current law, leaving only two types of amendments as automatic triggers: (1) a reverse stock split resulting in the corporation acquiring a shareholder’s interest at a price set by the corporation, and (2) the corporation’s conversion to a nonprofit or cooperative organization.
Exclusivity of Appraisal Remedy
The bill reiterates that appraisal is the sole remedy available to complaining shareholders, barring shareholders from challenging the legality of corporate actions duly approved by shareholders. It marks significant improvement on the existing provision governing exclusivity of appraisal, however, by clarifying the circumstances in which shareholders may seek remedies beyond appraisal. Existing law permits other remedies only for an “unlawful or fraudulent” action (for evidence of the difficulty courts have in applying such a general standard, see Werner v. Alexander, 502 S.E.2d 897 (1998)).
The bill specifies that the appraisal-exclusivity limitation does not apply when the action: (1) is not approved by all applicable procedures; (2) was procured by fraud, material misrepresentation, or omission of a material fact necessary to render statements not misleading; (3) is an interested transaction not otherwise ratified by disinterested directors or shareholders; or (4) was approved without meeting by fewer than all shareholders, when challenged by a shareholder who did not consent.
Amended Appraisal Procedures
The bill alters the procedural responsibilities of corporations and objecting shareholders in many detailed ways, which corporate boards and management should review closely when planning fundamental changes that may create appraisal rights. We have highlighted a few below:
- Content of Advance Notice: The bill adds content to a corporation’s required notification of record shareholders that appraisal rights may be available in a proposed transaction. Under the bill, the required notice of appraisal rights given before a shareholder vote, and the notice of past effective action required for shares not entitled to vote, should be accompanied by the corporation’s most recent annual financial statements, or reasonably equivalent information, and quarterly financial statements, if any. Both financial statement requirements, however, may be waived in writing by shareholders.
- Notice Requirement for Action without Meeting: The bill creates a new advance notice requirement for action without meeting when the action is governed by the appraisal rights statute. Corporations proposing such action without meeting must notify record shareholders of the availability of appraisal rights, and must attach a copy of the appraisal rights statute, upon solicitation of shareholder consent to action, and, for shareholders not consenting, upon notification of the proposed action and notification of the action’s taking effect without unanimous written consent.
- Appraisal Notice and Demand Form: Current law requires a corporation to send an appraisal notice and form to all shareholders that have expressed written intent to demand appraisal. The new bill requires the corporation to also deliver the notice and form to any shareholders who are not entitled to vote on the action but may have appraisal rights under the law, even if those shareholders fail to notify the corporation of their intent to demand appraisal.
The bill also adds content to the appraisal notice and demand form sent to shareholders. The new content notably includes (i) the date of initial disclosure of the terms of the proposed action to shareholders, along with certifications by the shareholder that it was a beneficial owner of the subject shares prior to such date, and that it did not vote for or consent to the action; and (ii) the corporation’s estimate of fair value of the shares. The shareholder certifications create new responsibilities for certain shareholders as well; a shareholder who fails to certify that its beneficial ownership preceded the date of initial disclosure may be treated by the corporation as a holder of after-acquired shares, allowing the corporation to delay payment on such shareholder’s appraisal demands under separate procedures from those applicable to other shareholders seeking payment or appraisal.
Finally, the bill extends, from thirty to forty days after delivery, the earliest date that the corporation may demand return of the form by shareholders.
- Fair Value Calculation: At the center of most shareholder disputes in appraisal proceedings is the question of fair value for the shares in question. The bill adds an express provision precluding assessment of a marketability or minority discount in the value calculation. Further, while the valuation applies to the point immediately prior to effectuation of the transaction, the bill departs from the Model Act by excluding any change in value caused by anticipation of the transaction, a provision apparently removed from the Model Act because of inconsistent judicial application.
- Shareholder Withdrawal: As under current law, a shareholder may perfect its demand for appraisal and payment through return of the required form and deposit of any certificated shares. The bill creates a new mechanism by which a shareholder seeking appraisal may revoke its demand, until a date set by the corporation in accordance with law.
- Judicial Resolution: The bill also makes important changes to the judicial resolution of a shareholder’s unresolved appraisal demand. When a shareholder makes a demand for a higher fair value than offered by the corporation, the new law departs from current law by requiring the corporation, rather than the shareholder, to commence a judicial proceeding within sixty days of receiving the shareholder’s demand for additional payment. The bill specifies that the corporation must file the action in the county in which its principal office sits or, if none, where its registered office sits.
The bill appears shareholder-friendly with respect to court costs, requiring assessment of court costs against the corporation, absent shareholder behavior that is arbitrary, vexatious or not in good faith, which reverses the discretion given to courts under existing law. The bill does preserve court discretion to award attorneys’ fees; (i) to shareholders when the corporation violates procedural requirements governing appraisal, or (ii) to either party when the other acts arbitrarily, vexatiously, or not in good faith.
- Suit for Nonpayment: The bill creates an express authorization for shareholders suing the corporation for nonpayment of any amount due under the appraisal statute, and awards all of the shareholders’ expenses in pursuing such action.