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
—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
giving liquidity rights to dissenters who “opt out” of majority rule in some fundamental transactions.
—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.
The Rules Comparison between US & China
1.Triggers for dissenters’ rights
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)
(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
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)
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.
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
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
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.
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
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.
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
(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
The capital of a company limited by shares is divided into shares of equal par value.
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.
Shares may be issued at the par value or at a premium but shall not be issued below par value.
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.
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.
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.
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.
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)
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
(3) distribution of shares to employees as an incentive;
(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
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 .
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!
The acting director may concurrently hold the post of the company's manger.
The appointment of the chairman and deputy chairman shall be prescribed in the articles of association.
(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;
(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.
(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;
(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.
——Shareholders and Employees
(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;
(4)proposing to convening temporary shareholders' meetings, and convening and presiding over shareholders' meetings when the board of directors does not exercise the functions of convening and presiding over the shareholders' meetings as prescribed in this Law;
(5)bringing forward proposals at shareholders' meetings;
(6)initiating actions against directors or senior managers according to Article 152 of this Law; and
(7)other duties as prescribed by the articles of association.
Where necessary, it (he) may hire an accounting firm to help it (him) with the relevant expenses being born by the company.