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
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.
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)
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
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)
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.
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
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
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.
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
Asset Value
$ 100
Earning Value
$ 120
Market Price
$ 75
Fair Value
Weight Given
45%
40%
15%
Amount
$45.00
$ 48.00
$ 11.25
$ 104.25
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.
Dissenters’ Appraisal Rights
Earnings
Scenario#1
(Million)
$0
Probability
Expected Value
(%)
10%
（Million）
$0.00
Scenario#2
$10
50%
$5.00
Scenario#3
$20
40%
$8.00
Total Expected Value
$13.0
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 riskfree alternative——investing the same amount in US
government bonds——would produce $13.0 million
annually.
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
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.
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.
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.
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 or within five days from
the record date for determination of dividend distribution
by the company.
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.
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.
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)
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.
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.
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 .
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 reelection at the annual meeting of shareholders.
• (3)Pre-condition for a valid vote on the Election of board
member
•
a. Notification; b. Quorum.
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
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.
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
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!
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)
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, unless it 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
shall comprise the representatives of
employees of this company.
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.
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.
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.
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.
• If no 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.
Board of directors
• Article 47 The 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;
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.
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.
• If the 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.
• If the 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.
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.
Manager of LLC
• Appointment and Dismissal (Art. 50)
• Authorities (Art. 50)
• The Acting Director can Take the Post of
Manager (Art. 51)
• 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.
• 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;
(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.
• 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.
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
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.
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.
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.
Supervisory Board
• Article 53 Every 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.
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;
Supervisory Board
(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.
Supervisory Board
• Article 55(section 2) If the board of supervisors or
supervisor of the company with no board of directors
finds that the company is running abnormally, it (he)
may make investigations.
Where necessary, it (he) may hire an accounting firm
to help it (him) with the relevant expenses being born
by the company.
• Article 57 The expenses necessary for the board of
supervisors or the supervisor of a company with no
board of supervisors to perform its (his) duties shall
be borne by the company.
Supervisory Board
• Article 55(section 1) The supervisors may attend the
meetings of the board of directors as non-voting delegates, and
may raise questions or suggestions on the matters to be
decided by the board of directors.
• Article 56 The board of supervisors shall hold meetings at
least once a year. The supervisors may propose to hold
temporary meetings of the board of supervisors.
• The discussion methods and voting procedures of the board of
supervisors shall be prescribed in the articles of association,
unless it is otherwise stimulated in this Law.
• The resolution of the board of supervisors shall be adopted by
half or more of the supervisors.
• The board of supervisors shall make records for the resolutions
on the matter it discusses, which shall be signed by the
supervisors in presence.
Issue Concerning the Voting
•
Q1: Why shareholders vote?
•
Q2: Why managers, labors and creditors cannot vote
on the business of companies?
• —capital dominates labor?
• —shareholders dominate creditors?
•
Q3: Shall shareholders be entitled to sell their votes?
•
Q4: Under what circumstances shall shareholders be
deprived of voting rights?