Absent an agreement permitting majority shareholders to purchase the interest of minority shareholders,
the majority shareholders have no right to purchase the interests of the minority shareholders, or to force
the minority shareholders to sell. However, a new California case seems to reduce the risk to majority
shareholders in utilizing a "freeze-out" short-form merger, whereby the minority shareholders of a target
corporation ("T") who own in the aggregate 10% or less of T, are involuntarily cashed out of their investment.

It is structured as follows: The control group of shareholders (owning in the aggregate 90% or more of T)
forms an acquisition entity ("A"), in which the control group owns all of the stock. The stock of T is contributed
to A by the control group, so A owns 90% or more of T. Using the "short-form" merger statutes in California
(which do not require a shareholder vote, or all of the shareholders to receive the same consideration in the
merger), T then merges into A, with A as the survivor. The minority shareholders in T are cashed out, and
have no further interest in A.

There are limits on this concept. First, the minority shareholders must receive a fair price for their shares in T.
The statutory merger framework provides if necessary for a court-supervised appraisal process.

Second, the minority shareholders, in a common-control scenario (that is, where A and T are under common
control, such as in the case of a short-form merger), can in lieu of exercising their statutory appraisal rights
sue to enjoin the transaction, or to rescind it if it has already closed. However, the operative statute provides
that the court shall not restrain or rescind the transaction unless the court has made a determination that
"clearly no other remedy will adequately protect the complaining shareholder or class of shareholders". A
court may be reluctant to grant such extraordinary relief, particularly if the merger transaction has already
closed and the court is asked to "unscramble the egg".

Do the minority shareholders have any other recourse? California also has a strong tradition that the majority
shareholders of a California corporation owe an equitable fiduciary duty to the minority shareholders. Do
minority shareholders who object to the merger have a right to sue the majority shareholders for damages,
whether for breach of fiduciary duty or on some other theory?

That was the question faced by a California appellate court in Busse v. United PanAm Financial Corp.[1]

United PanAm Financial was a sub-prime lender of used car loans, which had been formed by one Guillermo
Bron in 1994. The company later went public, and before the Great Recession its stock traded as high as
$26 per share. However, the recession hit the company hard, and its stock dropped as low as $1.59 by 2008.
Bron, who controlled approximately 40% of the outstanding shares, decided that this was a good opportunity
to take the company private. A special committee of the Board negotiated a price of $7.05 per share with
Bron, below the book value of $8.54 per share. The merger was narrowly approved by the shareholders, and
subsequently closed. Busse and another dissident shareholder sued Bron for breach of fiduciary duty.

In a lengthy summary of relevant cases, the Court observed both before and after the enactment of the current
Corporations Code in 1975, California law had been clear that no such right to sue for damages existed in
situations not involving common control, since the dissident shareholders had the right to an appraisal. The
Court also found that in adopting the provision of California law applicable to common-control situations (giving
the dissident shareholders the additional right to sue to enjoin the transaction), the Legislature had not
recognized, nor intended to create by enacting a new statutory merger framework, a right to sue for damages
(whether on a theory of breach of fiduciary duty or some other theory).

While the merger in Busse was not a short-form merger, the case's rationale seems to apply to a short-form
freeze-out merger. A freeze-out merger does not allow the majority shareholders to cash out the minority
shareholders at an unfair price—the appraisal process[2] ensures that. But freed from the specter of possible
personal liability for alleged breach of fiduciary duty, majority shareholders who now seek to freeze-out their
minority brethren after Busse face significantly less risk.

[1] 222 Cal. App. 4th 1028 (2014).
[2] Furthermore, the California Supreme Court has held that an appraisal action can take into account any diminution in value of the shares due to a breach of fiduciary duty, Steinberg v. Amplica, Inc., 42 Cal. 3d 1198 (1986).