California Court of Appeal Clarifies Rights of Dissenting Shareholders in "Common Control" Merger

Corporations Code Section 1312 addresses the rights of minority dissenting shareholders in a short form merger context.  The statute in subsection (a) states, and the California Supreme Court has long held, that minority shareholders who dissent from a merger vote have no right to rescind the merger or sue for damages; however, the shareholders may institute an appraisal proceeding and obtain the fair value of their shares. Until the recent decision in Busse v. United Panam Financial Corp. (, no reported decision dealt with subsection (b) of Section 1312 which addresses circumstances where merger partners are under common control.  The case first addressed whether in fact an individual with 40% voting control of the entity being acquired who also held the position of Chairman of the Board held common control.  The Court concluded that those facts coupled with some allegations of control over other directors and admissions from public statements about the individual's ability to control the corporation's activities were enough to allege control.  The Court then reached the critical question:  what rights did the minority dissenting shareholders have?   The Court held that they (1) could seek rescission, or (2) could sell their shares through an appraisal proceeding.  They could not, however, sue for damages under breach of fiduciary duty and other similar claims.  Thus, in common control situations, dissenters have more expansive rights but they are still substantially limited by Section 1312.