Changes in the Model Business Corporation Act--Relating to Amendments to Appraisal Rights (Section 1.40 and 6.40 and Chapter 13)

The Corporate Laws Committee of the ABA Business Law Section (the “Committee”) from time to time makes changes in the Model Business Corporation Act (the “Model Act”). By publication after second reading in the Summer 2024 issue of The Business Lawyer, the Committee proposed amendments to sections 1.40 and 6.40 and Chapter 13 of the Model Act relating to appraisal rights.

At its meeting on December 7, 2024, the Committee approved those amendments upon third and final reading without change and also approved conforming changes (i) to the Official Comment of certain other sections of the Model Act, as set forth below, with deletions shown by strikeout and additions by underscoring, and (ii) to the “Special definitions” portion of the Cross-References of section 1.40.

Conforming Changes to the Official Comment

Official Comment to § 1.40. Act Definitions – Third paragraph under “Beneficial Shareholder”

Unlike section 7.23, which provides for a procedure to specify a beneficial owner in a beneficial ownership certificate, or section 13.01, which defines “beneficial owner” for purposes of appraisal, the definition of “beneficial shareholder” does not prescribe a procedure for establishing beneficial ownership. Where a court proceeding is involved, as it is, for example, in sections 7.41 (derivative proceeding), 13.30 (appraisal rights), and 14.30 ( judicial dissolution), the court can determine what is necessary to establish who is a beneficial ownershipshareholder. In other situations, custom and practice and the reasonable requirements of the corporation should apply. Thus, a certification of a broker-dealer or other financial institution or a current account statement from such an institution often is sufficient to establish beneficial ownership. In the case of a public corporation, a filing with the Securities and Exchange Commission identifying beneficial ownership might be sufficient.

Official Comment to § 1.42. Number of Shareholders

The Act generally avoids provisions that are based on the number of shareholders of a corporation, since these provisions may encourage individual shareholders to divide or combine their holdings for private strategic advantage. But the number of shareholders is important in determining: (i) whether the market exception to appraisal rights is available under section 13.02(b)(2) and (ii) whether a shareholder may bring a proceeding for judicial dissolution under section 14.30(a)(2).

Official Comment to § 9.20. Domestication – Paragraph 4

4. Appraisal Rights

This subchapter does not require that a shareholder in the domesticating corporation receive the same type or amount, or even any, shares of the domesticated corporation. However, a shareholder of a domestic corporation that domesticates into a foreign jurisdiction has appraisal rights if the shareholder does not receive shares in the domesticated corporation having terms as favorable to the shareholder in all material respects, and representing at least the same percentage interest of the total voting rights of the outstanding shares of the domesticated corporation, as the shares held by the shareholder before with respect to shares for which it receives eligible interests or if the domestication. is an “interested transaction.” See sectionsections 13.02(a)(61)(iii) and (a)(4)(iii).

Official Comment to § 9.31. Plan of Conversion – Second paragraph

The conversion of a domestic corporation to a foreign eligible entity must be adopted and approved as provided in section 9.32. Shareholders of a domestic corporation that adopts and approves a plan of conversion have appraisal rights. See chapter 13 with respect to shares for which they receive eligible interests or if the conversion is an “interested transaction.” See sections 13.01(a)(1)(iv) and (a)(4)(iv).

Official Comment to § 11.04. Action on a Plan of Merger or Share Exchange – Second paragraph under “1. In General”

Subject to the exceptions set forth in section 11.04(b), a plan of merger must always be approved by the shareholders of a corporation that is a party to a merger and a plan of share exchange must always be approved by shareholders of the class or series that is being acquired in a share exchange. Under section 11.04(h) approval of a plan of merger by the shareholders of a surviving corporation is not required if the conditions stated in that section are satisfied. Under section 11.04( j), shareholder action by selling shares in a tender offer or exchange offer is accepted as an alternative to the traditional consent by voting if the conditions specified in section 11.04( j) are met.

Section 11.04(g), together with the appraisal rights provisions of chapter 13, is designed to assure that in transactions or actions that may occur under chapters 9, 10, 11 and 12, a shareholder has either a group voting right or an appraisal right.

Official Comment to § 11.07. Effect of Merger or Share Exchange – Second paragraph

In contrast to a merger, a share exchange does not vest in the acquiring entity the assets of the acquired entity, or render the acquiring entity liable for the liabilities of the acquired entity. The statements in sections 11.07(a)(8) and 11.07(b) regarding the rights of former holders of shares or eligible interests are not intended to preclude an otherwise proper question concerning the validity of the merger or share exchange, or to override or otherwise affect any provisions of chapter 13 concerning the exclusiveness of rights under that chapter.

Official Comment to § 12.02. Shareholder Approval of Certain Dispositions – Third paragraph under “3. Quorum and Voting”

The Act does not mandate separate voting by voting groups on dispositions, because after a disposition under this chapter the rights of all classes or series of shares remain the same. Separate voting by voting groups may nevertheless be required if provided for in the articles of incorporation or by the board of directors, acting pursuant to section 12.02(c). Appraisal may be available to shareholders entitled to vote on the disposition. See chapter 13.