Dissenters’ Rights: The Colorado Supreme Court Finally Speaks

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Lindoe Case: Fair Value Issues

The Colorado Supreme Court initially entered the dissenters’ rights arena in 2003 in Lindoe⁶ to resolve a Court of Appeals conflict over whether a “marketability discount” may be applied in determining fair value. A marketability discount adjusts for a lack of liquidity in a shareholder’s ownership interest in an entity, on the theory that there is a limited supply of potential buyers for stock in a closely held corporation.⁷ The CBCA, like the statutory provisions of most states, does not expressly address the question of discounts in the statutory definition of fair value. Instead, Section 7-113-101(4) simply states that fair value means “the value of the shares before the effective date of the corporate action to which the dissenter objects.”

A frequent question involving fair value is whether common minority and marketability discounts should apply to the valuation of a dissenting party’s shares.⁸ Courts that have addressed this matter have produced conflicting decisions with myriad rationales. In Lindoe, the minority discount issue was decided at the appeals court level and was not appealed to the Supreme Court. Regarding a marketability discount, the Supreme Court held that it should not apply as a matter of law.⁹

Underlying Facts

Lindoe, Inc. (“Lindoe”), was a shareholder in Pueblo Bancorporation (“Holding Company”). Lindoe was a Subchapter C corporation under the Internal Revenue Code (“Code”). Holding Company, which itself also was a Subchapter C corporation, instead desired to make a Subchapter S election under the Code. However, to qualify as an S corporation, a corporation cannot have any C corporations as shareholders.

To accomplish its corporate objectives, Holding Company agreed to merge into a newly created S corporation. Only those shareholders that could legally own shares in an S corporation were eligible to remain shareholders of the surviving corporation. Shareholders such as Lindoe, which were ineligible to receive shares of the surviving S corporation entity because they were C corporations (or otherwise were ineligible S corporation shareholders), instead received a cash payout in exchange for shares of Holding Company stock.

Lindoe chose to dissent from the $341 per share cash-out price established by Holding Company. Instead, Lindoe exercised its right under the CBCA to have a court determine the fair value of its shares. The trial court first concluded that the pro rata value of the outstanding shares in Holding Company was $666.16 per share. The trial court then applied both a minority discount and a marketability discount to arrive at a fair value determination of $362.03 per share.¹⁰ Lindoe appealed the trial court’s decision to apply the two separate discounts.

Court of Appeals Decision

In addressing the minority discount, the Court of Appeals cited a recently issued Colorado Court of Appeals case, M Life Insurance Co. v. Sapers & Wallack Insurance Agency, Inc.¹¹ In M Life, the Court of Appeals had determined that the application of a minority discount:

1)deprives minority shareholders of their proportionate interest in a going concern;

2)values minority shares below majority shares, resulting in unequal treatment of the same class of shares;

3)undermines the primary goal of a dissenters’ rights statute (protecting minority shareholders from being forced to sell at unfairly low values while allowing the majority shareholders to proceed as they desire); and

4)encourages oppressive conduct by the majority shareholders.

Agreeing with the M Life court’s analysis, the Court of Appeals in Lindoe concluded that the trial court should not have applied a minority discount. Holding Company did not appeal this portion of the opinion.

The Court of Appeals in Lindoe addressed the trial court’s use of a marketability discount by first reviewing and analyzing numerous considerations for and against a marketability discount. In determining that the arguments against the application of a marketability discount were more persuasive than those in its favor, the Court of Appeals relied heavily on several sources.

These sources were: (1) the rationale set forth in the Model Business Corporation Act (“Model Act”), on which the CBCA was based; (2) the Delaware decision in Cavalier Oil Corp. v. Harnett;¹² and (3) Principles of Corporate Governance promulgated by the American Law Institute (“ALI”).¹³ Each of these authorities supported the position that a dissenting shareholder should be awarded the proportional value in the corporation valued as a whole and not their individual shares valued standing alone.

Ultimately, the Court of Appeals in Lindoe held that the trial court should not have applied a marketability discount. This result was in direct opposition to prior cases decided by the Colorado Court of Appeals, including the recent M Life decision, which had permitted the application of a marketability discount.¹⁴ Holding Company appealed this aspect of the opinion to the Colorado Supreme Court.

Supreme Court Decision

On appeal, in a 4-3 decision, the Colorado Supreme Court held in Lindoe that the question of whether to apply a marketability discount is a question of law, not a question of fact for trial courts to determine. In doing so, the Court rejected the determination of fair value on a case-by-case basis and overruled a number of prior Colorado Court of Appeals decisions.¹⁵

The Supreme Court stated that the Colorado legislature intentionally used the phrase “fair value” in the dissenters’ rights statute and that the term represented a different standard than “fair market value,” again abrogating prior Court of Appeals decisions.¹⁶ After determining what fair value did not mean, the Lindoe Court concluded that fair value was the shareholder’s pro rata share of the corporation without any marketability discount.

The Court examined the purpose of the dissenters’ rights statute and found the statute was intended to compensate the shareholder for what it has lost: its proportionate interest in a going concern. The Court concluded that a marketability discount would inject unnecessary speculation into the appraisal process. After reviewing the Model Act’s influence on the relevant provision, the Court looked to cases from other jurisdictions for further support, including what it termed the leading case on the issue, Cavalier Oil.¹⁷

The Court relied on the Delaware Cavalier Oil decision, the fact that a number of other jurisdictions already had followed Cavalier Oil, and the ALI’s endorsement of a definition of “fair value” that excluded a marketability discount. The Court decided that a marketability discount should not apply as a matter of law.

The Lindoe case represents an important victory for dissenting shareholders who seek to challenge a corporation’s determination of fair value. Subject to some of the open questions described below, it also offers trial courts significant guidance as to how to determine fair value under the CBCA.¹⁸

Szaloczi Case: Exclusivity Issues

Following shortly on the heels of Lindoe, the Colorado Supreme Court issued its opinion in the Szaloczi case in 2004.¹⁹ In this case, the Court addressed the question of whether a dissenting shareholder seeking fair value in an asset sale also may pursue a separate claim for compensatory damages against the officers and directors of a Colorado corporation for breaching their fiduciary duties in connection with the sale. In upholding the dismissal of the minority shareholder’s action, the Court determined that the statutory appraisal remedy provided by the CBCA generally provides an exclusive remedy at law.²⁰

Underlying Facts

In Szaloczi, a closely held corporation provided notice of a shareholders’ meeting to approve the sale of substantially all of its assets. In accordance with the dissenters’ rights provisions of the CBCA, the minority shareholder trust delivered notice of its intent to demand payment for its shares if the sale was effectuated, and subsequently voted against the sale. However, before the trust delivered its actual demand for payment required by the CBCA, it filed an action against the officers and directors of the corporation for breach of fiduciary duty and conspiracy to deprive it of the value of its shares.

The nature of the complaint was that the other shareholders structured the asset sale for their personal benefit. The trust alleged that the other shareholders, acting in their capacity as officers and directors: (1) withheld information; (2) granted themselves stock options below market value; (3) extended stock options beyond the expiration dates; (4) negotiated personal employment contracts for themselves in connection with the sale; and (5) arranged to take more from the sale of assets by paying themselves as officers rather than as shareholders. The complaint sought compensatory money damages rather than equitable relief—for example, an injunction to prevent a sale from occurring or rescission of a sale.

The trial court dismissed the minority shareholder’s action. It held that the statutory appraisal right was an exclusive remedy that precluded the action for compensatory damages.

Court of Appeals Decision

The Court of Appeals reversed the trial court’s holding. In doing so, it held that the minority shareholder’s action for compensatory damages fell within the fraud exception contained in the “Exclusivity Provision” of CBCA § 7-113-102(4), which provides:

A shareholder entitled to dissent and obtain payment for the shareholder’s shares under this article may not challenge the corporate action creating such entitlement unless the action is unlawful or fraudulent with respect to the shareholder of the corporation.

In doing so, the Court of Appeals relied heavily on Delaware case law, specifically Weinberger,²¹ which stated that the appraisal remedy is exclusive except where fraud, misrepresentation, self-dealing, or gross overreaching is involved.²²

Supreme Court Decision

In reversing the Court of Appeals, the Colorado Supreme Court held that the action for damages against the officers and directors could not proceed based on its reading of the Exclusivity Provision. In so holding, the Court interpreted the “unlawful and fraudulent conduct” language of the Exclusivity Provision very narrowly. The Court determined that to fall within the exception rather than the general exclusivity rule, a party must file a complaint seeking equitable relief—meaning the plaintiff may seek only to block the transaction or seek rescission, but not receive compensatory damages.²³ The Court also specifically found the Exclusivity Provision covered actions against both the corporation and its officers and directors.

The minority shareholder had sought only to challenge the directors’ specific actions in connection with the sale that gave rise to the right to dissent. However, the Colorado Supreme Court stated that following the effective date of the relevant corporate action, a dissenting shareholder’s only right is to receive payment for the shares.²⁴ Under a literal reading, the Szaloczi case would foreclose a dissenting shareholder from bringing or continuing any action in such party’s capacity as a shareholder for compensatory damages following the effective date of the event that gave rise to dissenters’ rights. This is true even if the pre-existing claim and challenged action were wholly unrelated to such triggering event.

The Szaloczi decision represents a significant victory for officers and directors of Colorado corporations involved in acquisitions. It generally should provide a great amount of protection, particularly against monetary claims. As a practical matter, this case will force minority shareholders who believe there is fraudulent conduct to promptly determine whether to file an equitable action seeking an injunction to block the potential transaction from occurring, or for rescission to restore the parties to the status quo.

Outstanding Dissenters’ Rights Issues

Now that the Colorado Supreme Court has decided the Lindoe and Szaloczi cases, it will be interesting to see whether the Court will continue to provide guidance on other outstanding dissenters’ rights issues. Courts in other jurisdictions recently have issued a number of opinions to further refine dissenters’ rights law. Some of the remaining issues in Colorado are discussed below.

Application of Minority Discounts

The Lindoe Court specifically noted that it was not addressing the applicability of a minority discount.²⁵ As such, the governing law in Colorado regarding minority discounts remains the Court of Appeals’ holdings in the M Life and Lindoe cases, which reject the application of minority discounts in determining fair value.²⁶ Given its recent analysis in Lindoe regarding marketability discounts, it seems unlikely the Colorado Supreme Court will overrule these decisions.

Marketability Discount Exceptions

Potentially, the Colorado Supreme Court may be amenable to limited equitable exceptions regarding the application of marketability discounts. The Colorado Supreme Court specifically noted in Lindoe that it was not addressing the question of whether an equitable exception, such as the ALI “extraordinary circumstances” exception, may apply.²⁷

The exception developed by the ALI in its Principles of Corporate Governance requires more than the absence of a trading market in the shares. Instead, the exception applies only when a trial court finds that the dissenting shareholder has held out to exploit the transaction giving rise to the appraisal so as to divert value to itself that could not be made available proportionately to other shareholders. Colorado lawyers and appraisers advising corporations in dissenters’ rights actions should keep the possibility of this exception in mind in presenting their cases, particularly because it was expressly adopted in the underlying Court of Appeals opinion in the Lindoe case.²⁸

Other Equitable Exceptions

The definition of “fair value” in CBCA § 7-113-101(4) specifically provides that the calculation should exclude any appreciation or depreciation in anticipation of the corporate action, “except to the extent the exclusion would be inequitable.” Although this provision was in the Model Act when the CBCA was adopted, it since has been removed from the Model Act.²⁹ Colorado courts have not defined the scope of the equitable exclusion recognized by the express statutory language. As above, lawyers involved in disputes over fair value should keep in mind its potential applicability.³⁰

Duty of Disclosure

A number of unresolved disclosure issues (some of which are related to the exclusivity issue discussed in Szaloczi) exist in Colorado. These include: (1) the amount and type of disclosure regarding the company and the proposed corporate action required to be made to shareholders to whom dissenters’ rights apply; and (2) the remedies available for failure to comply with relevant disclosure requirements.³¹

Over the past few years, state law disclosure requirements in most states have expanded in a parallel manner to developments regarding disclosure on the federal level.³² Delaware in particular has focused on the disclosure obligations of directors and the right of shareholders to cast informed votes. The duty of disclosure has been found to exist in a variety of circumstances where shareholders are entitled to vote.³³

Colorado courts have not addressed the general questions of how much and what type of disclosure regarding the company (e.g., financial information, future prospects) and the proposed corporate action must be provided to (i) shareholders who are entitled to assert dissenters’ rights at the time approval is sought for the transaction giving rise to the dissenters’ rights or (ii) shareholders who are entitled to demand payment following the authorization of the corporate action along with the statutorily required dissenters’ notice.³⁴ As the law regarding the duty of disclosure develops generally in Colorado, it may impact the type of disclosure provided to parties entitled to exercise dissenters’ rights at these various stages. Until that time, Colorado attorneys should generally familiarize themselves with judicial developments in other states.

Not surprisingly, Delaware courts have taken the lead on disclosure issues in the dissenters’ rights context. In Turner v. Bernstein,³⁵ minority stockholders of a non-public corporation, GenDerm challenged the merger of GenDerm into a wholly-owned subsidiary of Medicis. GenDerm provided the minority stockholders with a notice of merger, a copy of the dissenters’ rights statutory provisions, and transmittal instructions. The dissenters sued the former GenDerm directors.

The plaintiffs alleged the merger was invalid because GenDerm’s stockholders did not receive material information regarding their right to seek an appraisal. The former directors of GenDerm maintained that the duty to provide disclosure shifted to Medicis under the merger agreement and pursuant to the requirements of DGCL § 262(d). In an earlier decision, the Delaware Chancery Court rejected this argument. However, in Turner, it refused to dismiss the claims against the former GenDerm directors, stating that these individuals had a duty to provide material information pre-merger to the stockholders.³⁶ The dicta as to what information could have been provided is instructive.³⁷

In Nagy v. Bistricer, the Delaware Chancery Court similarly granted the plaintiff’s motion for summary judgment on disclosure claims.³⁸ In the Nagy case, the plaintiff challenged a merger in which a closely held corporation became a wholly-owned subsidiary of another entity. The court found that the defendants had failed to disclose a series of categories of information that, in many respects, resemble the detailed disclosures required by federal securities laws.³⁹ In doing so, the Delaware Chancery Court did not apply a different standard for disclosure obligations in the private company context.⁴⁰

As the law regarding disclosure to shareholders develops generally, it is easy to foresee Colorado courts being faced with the issue of whether to interpret the “unlawful or fraudulent” language of the Exclusivity Provision of the CBCA to include a failure to provide adequate disclosure. Similarly, to the extent that a common law duty of disclosure is found to exist prior to the payment of fair value, courts may need to decide whether to adopt a judicial exception to the Exclusivity Provision based on such failure, similar to the exception developed in Delaware discussed above.⁴¹

A separate area of ambiguity regarding disclosure at the time of payment of fair value by the corporation arises under CBCA § 7-113-206(2)(a). This provision requires a corporation to provide certain financial information (such as balance sheets and income statements) to a dissenting shareholder, along with the payment of the corporation’s estimate of fair value for the shares. Certain of these disclosure obligations are triggered only if a corporation “customarily provides audited financial statements to its shareholders.” This phrase is subject to interpretation.⁴²

The best advice in advising a Colorado corporation at this stage may be to overdisclose, so as to avoid violating the statute. As noted above, the remedy for violating the disclosure provision set forth in the CBCA is unclear at this time.

Parties Entitled to Dissenters’ Rights

An issue that recently has been litigated in other jurisdictions involves the scope of the parties that are entitled to exercise dissenters’ rights. For example, in November 2004, in Aspen Advisors, LLC v. United Artists Theatre Company,⁴³ the Delaware Supreme Court rejected the claims of holders of warrants that they were entitled to dissenters’ rights in connection with a merger.⁴⁴

In Aspen Advisors, warrant holders were entitled to receive the same merger consideration as common stockholders under the terms of their warrants. The plaintiffs asked the court to conclude that warrant holders therefore also were guaranteed all the rights (contractual, statutory, or under common law, including the right to receive fair value pursuant to an appraisal proceeding) that would have belonged to them had they actually converted their warrants into common stock before the merger.⁴⁵ However, this argument was rejected by both the Delaware Chancery Court and the Delaware Supreme Court.

Merger and acquisition practitioners should recall that under the CBCA, both “record shareholders” and “beneficial shareholders” are entitled to dissenters’ rights in Colorado, as are shareholders who do not have voting rights.⁴⁶ Because these definitions are fairly clear (and assuming that Colorado courts follow the well-reasoned Aspen Advisors opinion), it is unlikely that Colorado will face the same issues in defining the scope of dissenters’ rights.

Advance Waivers of Dissenters’ Rights

For many companies, particularly businesses that have private equity or venture capital investors, it is common to have certain (if not all) shareholders grant “drag-along” rights to majority shareholders. Under these provisions, shareholders agree in advance to participate in a future sale of the company if a certain percentage of the shareholders (or often the preferred shareholders) support the transaction.

The typical investors’ agreement contains covenants requiring such shareholders to vote in favor of the merger or sale of the assets of the company as well as to not exercise any dissenters’ rights. These provisions have become more commonplace following the recent Delaware Supreme Court decision in Omnicare v. NCS Healthcare, Inc., which invalidated a merger agreement that had been locked up through a variety of legal devices.⁴⁷

Colorado appellate courts have never addressed the issue of advance waivers of dissenters’ rights.⁴⁸ Colorado attorneys occasionally question the enforceability of such provisions, either on: (1) public policy grounds—for instance, whether majority shareholders can force minority shareholders to waive an express statutory right designed to protect such shareholders; or (2) by reference to general case law regarding disclosure requirements necessary for an effective waiver.⁴⁹ In addressing these issues, practitioners should recall that the CBCA expressly allows voting agreements among shareholders.⁵⁰

Dissenters’ Rights in Asset Sales

Under CBCA § 7-113-102(1)(c), dissenters’ rights in Colorado apply to a “sale, lease, exchange or other disposition of all, or substantially all, of the property of the corporation” for which a shareholders vote is required under CBCA § 7-112-102(1).⁵¹ A trap that sometimes catches Colorado practitioners relates to notices required in connection with such asset sales. CBCA § 7-111-102(5) states that notice of the shareholders’ meeting at which the transaction is to be considered should be given to shareholders entitled to vote on the transaction.

Conversely, the dissenters’ rights provisions in CBCA § 7-113-201(1) require that notice be given to all shareholders if the transaction gives rise to dissenters’ rights, regardless of whether they have the right to vote on the underlying transaction. Accordingly, because all shareholders have the right to dissent from a sale of all or substantially all of a corporation’s property, even shareholders who have no right to vote on the underlying transaction are entitled to notice of the meeting at which the sale is to be considered.⁵²

Another major open issue in Colorado is the definition of what constitutes “substantially all” of the assets of a company. Delaware has developed an extensive body of law outside the dissenters’ rights arena dealing with the definition of “substantially all” of the assets of companies involved in acquisitions.⁵³ In Gimbel v. Signal Cos., Inc.⁵⁴ and the cases that have followed it, Delaware courts have applied a quantitative and qualitative test to determine what constitutes “substantially all” of a corporation’s assets.⁵⁵ The Delaware approach takes into consideration both the proportional value of the assets being transferred, and whether the transfer would result in a fundamental change of the company business. This approach also leaves significant room for judicial flexibility.

The Delaware formulation is somewhat at odds with the approach of the Model Act. The official comment to the Model Act section in existence at the time the CBCA was adopted emphasized that “substantially all” should be interpreted to mean “nearly all” of the assets of a company.⁵⁶ The 1999 Amendments to the Model Act further set forth a bright-line safe harbor for what constitutes substantially all of the assets of a business.⁵⁷ Based on the recent Colorado Supreme Court decisions, it appears more likely that Colorado courts will adopt the narrower approach to substantially all of the assets of a company used by the drafters of the Model Act than the standard that has developed judicially in Delaware. (See Interpreting Corporate Issues Under the CBCA, below.)

Interpreting Corporate Issues Under the CBCA

As business attorneys know, case law is limited in many areas of Colorado corporate law, including interpretation of numerous CBCA provisions. As a result, the opinions issued by the Colorado Supreme Court in Lindoe and Szaloczi provide some helpful guidance as to what sources Colorado courts in the future likely will look, as a general matter, in interpreting corporate matters arising under the CBCA.

Persuasiveness of Delaware Law

A threshold question that has generated prior debate among the Colorado corporate bar is the degree to which Colorado courts are influenced by Delaware law. Delaware courts have developed considerable expertise in dealing with corporate legal issues and the Delaware Chancery Court is widely held in high esteem by business attorneys.⁵⁸ Thus, given the substantial body of case law construing the DGCL, it is not surprising that Colorado courts in the past have favorably cited Delaware law on corporate issues that Colorado courts have not otherwise addressed.⁵⁹ The degree to which it makes sense for Colorado courts to look to Delaware law, however, has been open to disagreement in large part because the CBCA is based on the Model Act, whereas the DGCL is not.⁶⁰

Although the recent Colorado decisions in the dissenters’ rights arena do not definitively resolve this debate, they suggest that it is appropriate for Colorado courts to continue to look to Delaware law in deciding certain open questions arising under the CBCA. In both Lindoe and Szaloczi, the Colorado Supreme Court extensively relied on prior Delaware case law. In the view of the authors, however, this occurred not because of an unwritten rule of statutory interpretation to look first to Delaware law on corporate matters, but because the cited Delaware opinions were consistent with or, in the Szaloczi case, directly influenced the relevant provisions of the Model Act that were at issue.⁶¹

Persuasiveness of the Model Act

In both Lindoe and Szaloczi, the Colorado Supreme Court started its analysis by noting the role the Model Act played in the adoption of the CBCA. This factor, in turn, was a primary driver of the Court’s legal analysis.

In Szaloczi, the Colorado Supreme Court began with the observation that the CBCA adopted the Model Act’s exclusivity provision—which the official comment to the Model Act stated was basically the “New York formula.”⁶² The Court reiterated that the drafters of the Model Act acknowledged that their formulation attempted to recognize and preserve the principles of exclusivity developed by Delaware and New York courts. As a result, the Court’s analysis properly focused only on relevant cases from Delaware and New York.⁶³

The Colorado Supreme Court’s mode of statutory interpretation in Lindoe bears many similarities. Although the Court’s analysis focused on the language and purpose of the relevant statutory provision, each of these components was significantly influenced by the Model Act. After noting that the CBCA was based on the Model Act, the Lindoe Court emphasized that one of the purposes of the Model Act was to facilitate a degree of national uniformity among state corporate law. This observation led the Supreme Court to examine the “national trend” on marketability discounts by reviewing the decisions of cases from other jurisdictions.⁶⁴

Nonetheless, the majority’s analysis did not simply review cases from states that had adopted language from the Model Act similar to that adopted by Colorado.⁶⁵ Moreover, unlike in Szaloczi, there is no indication that the Model Act’s fair value definition on which the CBCA was based was itself derived from or influenced by Delaware law. Finally, as the dissent implies, the majority’s reliance on the 1999 amendments to the Model Act (which specifically state in the statutory provision that minority and marketability discounts should not apply) is questionable because this language was not in the version of the Model Act originally adopted in Colorado, and was not subsequently added to the CBCA dissenters’ rights provisions by the Colorado legislature.⁶⁶

As a result of the foregoing, it seems likely that Colorado will continue to rely heavily on the Model Act (including relevant official comments), as well as decisions from other Model Act states that have adopted similar statutory language in deciding issues arising under the CBCA.⁶⁷ As always, practitioners need to be cognizant of situations where Colorado has not adopted certain amendments to the Model Act and the impact of the failure to do so on a court’s statutory analysis.⁶⁸

Persuasiveness of the ALI

The Colorado Supreme Court’s discussion of the ALI’s Principles of Corporate Governance in Lindoe also is noteworthy. First, Lindoe follows closely on the heels of a favorable citation to the ALI’s Principles of Corporate Governance by the Court in a case addressing special litigation committees.⁶⁹ Second, in many other areas of law, Colorado courts have been influenced significantly by the work of the ALI.⁷⁰ As a result, practitioners probably should expect to see the Court pay attention to the ALI’s recent corporate publication in the future.

Conclusion

Although the Colorado Supreme Court waited almost a decade after the adoption of the CBCA to weigh in on dissenters’ rights issues, two recent opinions should provide useful. The Lindoe and Szaloczi decisions resolved some issues for Colorado that have divided academics and courts in other jurisdictions. While [Lisa—or change the first “although” in this paragraph to while] there remain a number of other interesting dissenters’ rights questions, the Colorado Supreme Court identified the sources that are likely to influence courts deciding issues arising under the CBCA in these and other corporate law matters.

NOTES

1. Corporate statutes typically provide minority shareholders with a statutory right to dissent from certain corporate actions, such as mergers and, in many jurisdictions, including Colorado, sales of all or substantially all of a corporation’s assets. In lieu of the consideration to which a party otherwise would be entitled in a sale, dissenting shareholders are entitled to receive the “fair value” of their shares of stock. Shareholders who desire to exercise their dissenters’ rights must follow the detailed procedures and satisfy the conditions set forth in the relevant statutory scheme. For a general overview of the mechanics of Colorado’s dissenters’ rights provisions, see Fogler and Witwer, “Buying, Selling and Combining Businesses Under the Colorado Business Corporation Act,” 33 The Colorado Lawyer 73, 75-76 (Nov. 2004).

2. In addition to the Delaware cases specifically discussed in this article, see In re Unocal Exploration Corp. Shareholders Litig., 793 A.2d 329, 332 (Del.Ch. 2000) (in the absence of fraud, illegality or a lack of complete disclosure relevant to the minority stockholder’s decision whether to accept the merger consideration or seek appraisal, appraisal rights are minority stockholder’s exclusive remedy in short form merger). See generally Wertheimer, “The Shareholders’ Appraisal Remedy and How Courts Determine Fair Value,” 47 Duke L.J. 613, 617 (1998); Murdock, “The Evolution of Effective Remedies for Minority Shareholders and Its Impact Upon Valuation of Minority Shares,” 65 Notre Dame L. Rev. 425 (1990).

3. Under the Delaware General Corporation Law (“DGCL”), stockholders of a Delaware corporation are provided with “appraisal rights” instead of “dissenters’ rights.” There are substantive differences between the appraisal rights provisions of the DGCL and the dissenters’ rights provisions of the Colorado Business Corporation Act (“CBCA”). For example, a sale of substantially all of the assets of a corporation does not trigger appraisal rights in Delaware. Philosophically, however, dissenters’ rights and appraisal rights serve the same purpose. For that reason, this article refers to all such provisions as “dissenters’ rights,” regardless of whether they are styled as appraisal rights under the applicable corporate statutory scheme.

4. Lindoe, 63 P.3d 353 (Colo. 2003).

5. Szaloczi, 90 P.3d 835 (Colo. 2004).

6. Lindoe, supra, note 4.

7. See M Life Ins. Co. v. Sapers & Wallack Ins. Agency, Inc., 40 P.3d 6, 13 (Colo.App. 2001).

8. If such discounts apply, a dissenting shareholder receives the value of owned shares in an open market transaction, which is less than the proportionate value of the entire corporation. If the dissenting shareholder receives the proportionate value of the entire corporation, this usually results in the dissenting party obtaining the full benefit of the underlying transaction that gave rise to the right to dissent.

9. Lindoe, supra, note 4 at 369.

10. The Court of Appeals stated that the trial court had applied separate 30 percent minority and marketability discounts, which are within the ranges appraisers typically apply when valuing a minority shareholder’s ownership in a privately held corporation. Application of such discounts results in a substantially lower value than the proportionate value of the entire corporation.

11. M Life, supra, note 7.

12. Cavalier Oil Corp. v. Harnett, 564 A.2d 1137 (Del. 1989).

13. Principles of Corporate Governance (St. Paul, MN: American Law Institute Pub., 1994).

14. In M Life, supra, note 7 the Colorado Court of Appeals held that the trial court erred in rejecting a marketability discount as a matter of law and remanded the case so the trial court could make findings to determine if a marketability discount applied under the pertinent facts. Id. at 13 (relying primarily on New York law in reaching its conclusion); see alsoWCM Indus. v. Trustees of Wilson Trust, 948 P.2d 36, 39 (Colo.App. 1997).

15. M Life, supra, note 7 at 13; WCM Indus., supra, note 14 at 39.

16. Breniman v. Agric. Consultants, Inc., 829 P.2d 493, 495 (Colo.App. 1992).

17. Cavalier Oil, supra, note 12.

18. Cede & Co. v. Technicolor, Inc., 2003 LEXIS 146, at *5-6, 2003 WL 23700218, at *2 (Del.Ch. Dec. 31, 2003), discussed the difficulty facing trial courts in determining fair value in dissenters’ rights proceedings:

Although 8 Del. C. § 262 requires this Court to determine “the fair value” of a share of Technicolor on January 24, 1983, it is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date, especially a date more than two decades ago. Experience in the adversarial battle of the experts’ appraisal process under Delaware law teaches one lesson very clearly: valuation decisions are impossible to make with anything approaching complete confidence.

It will be interesting to see whether the Lindoe decision gives rise to renewed debate in Colorado regarding whether a “fair value” standard similar to that employed in the dissenters’ rights arena should apply to marital dissolution actions. Arguably, non-propertied spouses are in an analogous position to dissenting shareholders. For a discussion of business valuations in divorce, see Levis, “Valuation of Businesses in Colorado Divorces,” 32 The Colorado Lawyer 73 (June 2003).

19. Szaloczi, supra, note 5.

20. Id. at 841-42.

21. Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983).

22. See John R. Behrmann Revocable Trust v. Szaloczi, 74 P.3d 371, 375 (Colo.App. 2002) (citing Weinberger, supra, note 21). Of note, the DGCL does not set forth a statutory exclusivity provision. Instead, Delaware courts have developed a rule of exclusivity that includes similar exceptions to those set forth in the CBCA, but also encompasses an exception for breach of fiduciary duty actions based on inadequate disclosure. See Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1190-91 (Del. 1988); Turner v. Bernstein, 776 A.2d 530, 547-548 (Del.Ch. 2000).

23. In its review of Delaware law, the Colorado Supreme Court in Szaloczi, supra, note 5, seemed to hold open the possibility that the Exclusivity Provision would not preclude an equitable action for rescissory damages where a traditional form of equitable relief (such as rescission) was not available.

24. See CRS § 7-113-204(2).

25. Lindoe, supra, note 4 at 358 n.3.

26. See Pueblo Bancorporation v. Lindoe, 37 P.3d 492, 496 (Colo.App. 2001); M Life, supra, note 7 at 13.

27. Lindoe, supra, note 4 at 369.

28. Pueblo Bancorporation, supra, note 26 at 498-99.

29. The 1999 amendments to the Model Business Corporation Act (“Model Act”) deleted this exception, with the new Official Comment 2 noting that such provision has “not been susceptible to meaningful judicial interpretation.” As a result, different statutory language (which to date Colorado has not adopted) was included in the revised Model Act.

30. Official Comment 3 to Model Act § 13.01 at the time of the adoption of the CBCA noted that the drafters of the Model Act intended to preserve the right to consider factors such as those used by the Delaware Supreme Court in Weinberger, supra, note 21. One commentator has speculated that consideration of the prospective transaction might be equitable where the corporation owned a unique asset for which there where few purchasers (such as a license, permit or real property) to take into account that the uniquely situated purchaser in fact was the party acquiring the corporation. See Krendl, Colorado Business Corporation Act and Article 90 Deskbook 2005-06 Edition (St. Paul, MN: West Pub., 2005), Author’s Comments to § 7-113-101.

31. Some have argued that as a policy rationale, when directors argue that a shareholder’s acceptance of consideration bars further relief, it is desirable to place on directors the burden of showing that the stockholder received sufficient information to make a knowing and informed decision as to whether to exercise dissenters’ rights. If the directors satisfy this burden, they should prevail. If the directors cannot satisfy this burden, however, they should be subject to breach of fiduciary duty claims, which are likely to be successful if disloyalty caused the failure to make sufficient disclosure. Arguably, this purpose is not served by dissenters’ rights actions.

32. SeeWisehart v. Zionsbancorporation, 49 P.3d 1200 (Colo.App. 2002) (discussing disclosure obligations of directors and controlling shareholders of closely held Colorado corporations); see alsoVan Schaack Holdings, Ltd. v. Van Schaack, 867 P.2d 892, 897-98 (Colo. 1994).

33. Circumstances where courts have found a disclosure duty include voting on mergers, asset sales, amendments to charter documents, elections of directors, and ratification of conflict-of-interest transactions.

34. In the authors’ experience, Colorado practitioners have not developed a uniform practice with regard to disclosure to dissenting shareholders. Moreover, unlike Colorado, § 228(a) of the DGCL permits action to be approved by shareholders’ written consent by less than unanimous consent. Whether the amount of disclosure that needs to be made in a transaction that already has been approved by less than unanimous written consent differs from a transaction approved following a shareholders’ meeting is an interesting legal question not yet addressed by Delaware courts. This issue also may arise in Colorado in the future, because Senate Bill 76, which was introduced in the 2005 Colorado legislative session and, as of the date this article went to press in early March 2005, passed the Colorado Senate, would allow shareholders of Colorado corporations to act by less than unanimous written consent.

35. Turner, supra, note 22.

36. Id. at 542. The Turner court, however, denied the plaintiffs’ motion for partial summary judgment on the disclosure claims, finding that there were genuine issues of material fact respecting whether the plaintiffs’ acceptance of the merger consideration waived their right to challenge the merger. Id. at 549.

37. The Turner court noted there was no evidence that the plaintiffs had access to “important information” such as GenDerm’s year-to-date performance or the board’s view of its future prospects. Id. at 543. The court further rejected the defendants’ argument that the plaintiffs had been provided with phone numbers of persons to call for more information, but that the plaintiffs failed to do so. Id. at 544; see alsoErickson v. Centennial Beauregard Cellular LLC, 2003 WL 1878583, Case No. Civ.A. 19974 (Del.Ch. April 11, 2003) (in short form merger, corporation had duty to disclose additional financial information and material regarding the company’s business and prospects to minority shareholders).

38. Nagy v. Bistricer, 770 A.2d 43 (Del.Ch. 2000).

39. Id. at 60.

40. Id. (citingTurner, supra note 22).

41. See Turner, supra, note 22; Nagy, supra, note 38; Erickson, supra, note 37.

42. See CRS § 7-113-206(2)(a). If a corporation does not have a consistent track record of obtaining audited financial statements or typically obtains audited financial statements but does not customarily provide them to the shareholders, it is not clear what the statutory provision would require to be disclosed. See Krendl, supra, note 30, Authors’ Comments to § 7-113-206.

43. Aspen Advisors, LLC, 861 A.2d 1251 (Del. 2004).

44. Id. at 1263.

45. As noted in the Aspen Advisors opinion, id., parties negotiating a warrant could agree contractually to provide the warrant holders with a right to a quasi-appraisal proceeding similar to that provided by the CBCA.

46. Beneficial shareholder is defined in § 7-113-101(1) of the CBCA as “the beneficial owner of shares held in a voting trust or by a nominee as the record shareholder” and record shareholder is defined in § 7-113-101(6) of the CBCA as “the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares that are registered in the name of a nominee to the extent such owner is recognized by the corporation as the shareholder as provided in section 7-107-204.”

47. Omnicare, 825 A.2d 264 (Del.Ch. 2002) (certain measures, consisting of a voting agreement and a “force the vote” provision in the merger agreement, invalid and unenforceable because measures precluded directors from fulfilling their fiduciary obligation to consider or accept a superior deal). See generally Hilton and Benitez, “Fiduciary Duties of Corporate Directors: Recent Case Law Developments,” 32 The Colorado Lawyer 65, 66-67 (Dec. 2003) (discussing Omnicare decision).

48. Note that one Colorado court previously has read Breniman v. Agricultural Consultants, Inc., 829 P.2d 493 (Colo.App. 1992) to stand for the proposition that articles of incorporation may not supersede requirements of dissenters’ rights statutes.See M Life, supra, note 7 at 12.

49. See 1 Bartlett, Equity Finance: Venture Capital, Buyouts, Restructurings and Reorganizations § 10:15-10:17 (Wiley Law Publications NY, NY 1995)at 234-25 (under Delaware law, such provisions appear to be valid, but because there is some doubt about legality, these provisions need to be drafted with particular care to set out exactly the respective obligations of the parties). The Delaware Chancery Court in Turner addressed a waiver of appraisal rights executed at the time of the transaction. The issue before the court was not whether the waiver itself was valid, but only whether the waiver as drafted was broad enough to waive claims for fiduciary duty claims in addition to appraisal claims. Turner, supra, note 22 at 545.

50. See CRS § 7-107-302. Note, however, that the CBCA omits the provisions on shareholder agreements set forth in Model Act 7.32 which clarify the kinds of voting rights permitted to be exercised by shareholders’ agreements.

51. Sales pursuant to either a court order or in the “usual and regular course of business” do not require shareholder approval or trigger dissenters’ rights under the CBCA. See CRS § 7-112-102(1).

52. The failure to give notice does not affect the validity of the action taken at the shareholders’ meeting, although it excuses the dissenting shareholder from complying with CBCA § 7-113-202. See CRS § 7-113-201(1). Practitioners also should recall that if they choose to forego a shareholders’ meeting and approve the action by written consent, copy of dissenters’ rights information must precede or accompany any written or oral solicitation of such consent, although (as above) the failure to do so does not affect the validity of the action. See CRS § 7-113-201(2).

53. See Dooley and Goldman, “Some Comparisons Between the Model Business Corporation Act and the Delaware General Corporation Law,” 56 TheBusiness Lawyer 737, 752 (May 2001).

54. Gimbel, 316 A.2d 599 (Del.Ch. 1974).

55. Id.; see alsoWinston v. Mandor, 710 A.2d 835, 843 (Del.Ch. 1997).

56. When the CBCA was adopted, Official Comment 1 to Model Act § 12.01 noted that a sale of all corporate assets other than cash and cash equivalents normally is a sale of substantially all of the assets. However, the Comment stated that a sale of several distinct manufacturing lines, while retaining one or more manufacturing lines, normally is not a sale of substantially all of the assets even though the lines being sold are substantial and include a significant fraction of the business of the company. Similarly, the Comment suggested a sale of a plant but retention of operating assets (e.g., machinery and equipment) with a view toward continuing the business at another location would not be a sale of substantially all of the assets of a business.

57. Section 12.02(a) of the Model Act currently requires shareholder approval to a sale or disposition of corporation assets if the disposition would “leave the corporation without a significant continuing business activity.” Section 12.02(a), as revised by the 1999 amendments, further provides a safe harbor from the shareholder approval requirement when the corporation retains a business activity that represented (1) at least 25 percent of total assets at the end of the most recently completed fiscal year and (2) at least 25 percent of either income from continuing operations before taxes or revenues from continuing operations for that fiscal year. See Model Act § 12.02(a).

58. See generally Bach and Appelman, “A History of the Creation and Jurisdiction of Business Courts in the Last Decade,” 60 The Business Lawyer 147, 216-220 (Nov. 2004).Given how many public companies incorporate in Delaware, it is not surprising that Delaware courts are viewed as the most influential in the country regarding corporate rulings.

59. E.g., Harding v. Heritage Health Prod. Co., 98 P.3d 945, 948 (Colo.App. 2004); Weisbart v. Agri. Tech, Inc., 22 P.3d 954, 957-58 (Colo.App. 2001). Note, however, that in Hirsch v. Jones Intercable, Inc., 984 P.2d 629 (Colo. 1999), the Colorado Supreme Court expressly rejected Delaware’s approach with regard to special litigation committees in favor of the New York model.

60. The Model Act and the DGCL are the two leading corporation laws in the United States, even though only three states have modeled their corporate statutes after Delaware. See generally Dooley and Goldman, supra, note 53. As a general matter, the DGCL is drafted in relatively broad terms, which results in a large body of common law decisions. The Model Act, on the other hand, is based on the assumption that states adopting it typically will not have a specialized judiciary. As a result, the Model Act often attempts to provide bright-line rules, thereby making up in predictability what Delaware has in flexibility. Id Although the Model Act codifies Delaware case law in some instances, in many others, it intentionally departs from decisions of Delaware courts.

61. An example of such an unwritten rule of interpretation is the predisposition of a number of Colorado Supreme Court justices to look first to Illinois law in interpreting issues arising under Colorado’s constitution because it originally derives from the Illinois constitution. See generally Oesterle and Collins, The Colorado Constitution: A Reference Guide (Westport, CT.: Greenwood Press, 2002).

62. Szaloczi, supra, note 5 at 840.

63. As a result, Colorado’s reliance on the Model Act can be viewed as an indirect reliance on Delaware and New York case law, because the Model Act drafters relied on prior decisions from those states in drafting the relevant section. Delaware law often has influenced the Model Act, as well as vice-versa. See Bach and Appelman, supra, note 58.

64. Lindoe, supra, note 4 at 364-67.

65. The majority opinion is open to some criticism on this point, inasmuch as the more logical conclusion would be that the goal was to facilitate uniformity only among the states that adopt the same provisions of the Model Act. Although there is a rule of construction that suggests that Colorado should follow the decisions of other jurisdictions that adopted the same model acts, this rule has not always been consistently followed. See In Interest of R.L.H., 942 P.2d 1386 (Colo.App. 1997); but seeIn re the Marriage of Cargill, 843 P.2d 1335, 1346-48 (Colo. 1993) (Erickson, dissenting) (noting failure of Colorado Supreme Court to interpret provisions of a statutory provision based on a model act consistently with other jurisdictions that adopted same provision).

66. Lindoe, supra, note 4 at 369 (Kourlis, dissenting).

67. The approach of the Colorado Court of Appeals in Harding v. Heritage Health Prod.Co., 98 P.3d 945, 948 (Colo.App. 2004), the only opinion issued since Szaloczi regarding interpretation of provisions of the CBCA, is consistent with this approach to judicial interpretation.

68. Interestingly, to date, no Colorado court has looked to the legislative history of the CBCA in analyzing ambiguous provisions, even though in certain circumstances this may provide explanations as to why Colorado chose not to adopt certain provisions from the Model Act or to adopt different language.

69. See Curtis v. Nevins, 31 P.3d 146, 154 (Colo. 2001).

70. According to the American Law Institute (“ALI”), as of March 1, 2004, Colorado courts have cited to the ALI’s Restatements 1,884 times and to the ALI’s Model Penal Code and Uniform Commercial Code 562 times. See http://www.ali.org/ali/AM04_07-RestatementCitations04.pdf (last visited March 7, 2005). Many of the amendments to the Model Act have been patterned on the ALI’s Principles of Corporate Governance. See, e.g., Comment 2 to § 13.01 of the Model Act. n

This month’s article was written by E. Lee Reichert, a partner with Kamlet Shepherd & Reichert, LLP—(303) 825-4200, lreichert@ksrlaw.com; and John R. Chadd.

This article originally appeared in the April 2005 edition of The Colorado Lawyer and is reprinted with permission.