DealLawyers.com Blog

Here’s something that Keith Bishop recently blogged:

I find that many California mergers and acquisition lawyers are more comfortable dealing with Delaware than California corporate law. However, there are still many thousands of California corporations that may be in the market to acquire or be acquired. Below are three common pitfalls California M&A pitfalls.

1. Failing to recognize that the California General Corporation Law applies. The CGCL will, of course, apply to any corporation organized under the CGCL. It may be a surprise to some, however, that Section 2115 makes numerous M&A related provisions of the CGCL applicable to some foreign corporations. These provisions include Sections 1001(d) (limitations on the sale of assets); 1101 (the provisions following subdivision (e)); Chapter 12 (reorganizations); and Chapter 13 (dissenters’ rights). Although Section 2115 imposes these provisions only on corporations that meet specific ownership and business thresholds (and that are not exempted), the point to remember is that it’s possible that California law will apply to parties incorporated in other states. If your thought is to take refuge in Vantagepoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 ( Del. 2005), you may want to remember that the lawsuit may not be filed in Delaware.

2. Failing to understand California M&A taxonomy. When reading the CGCL, it is important to remember that it uses a large number of defined terms. Unfortunately, the fact that terms have statutory definitions is not readily apparent to the casual reader because those terms are not often capitalized or otherwise identified. For example, the CGCL defines “reorganization” in Section 181 as any of three types of transactions: a merger pursuant to Chapter 11; an exchange reorganization, or a sale-of-assets reorganization. The CGCL applies to other types of M&A transactions but those transactions are not reorganizations as defined by the CGCL. For example, a sale of assets for cash is not a sale-of-assets reorganization as defined Section 181, but it is subject the special approval requirements of Section 1001(d). See When a Sale of Assets is not a “Sale-of-Assets Reorganization” . Also, the CGCL imposes special requirements on “share exchange tender offers” as defined in Section 183.5 even though a “share exchange tender offer” can never be an “exchange reorganization” or even a “reorganization”

3. California law imposes unique approval requirements. Under Section 1001(d), for example, when an acquiring party in a sale-of-assets reorganization or an acquisition of all or substantially all of the assets of a corporation that isn’t a sale-of-assets reorganization is in control of or under common control with the disposing corporation, the principal terms of the transaction must, with certain exceptions, be approved by at least 90% of the voting power of the disposing corporation. See Seeing Red And More Than 50% Ownership May Mean A 90% Vote. A similar limitation on cash-out mergers can be found in Section 1101 (the provisions following subdivision (e)). Section 1201(a) also imposes a class vote with respect to the principal terms of a reorganization. This was, in fact, the issue in the Vantagepoint case.