Utah Bar Journal

A Utah corporation is subject to the Control Shares Act only when it is an issuing public corporation that is the target of a control share acquisition. An “issuing public corporation” is a corporation, other than a depository institution, that is organized under Utah law and that has: (a) 100 or more shareholders; (b) its principal place of business, its principal office, or substantial assets within the state; and (c) (i) more than 10% of its shareholders resident in the state; (ii) more than 10% of its shares owned by Utah residents; or (iii) 10,000 shareholders resident in the state. See Utah Code Ann. § 61-6-5(1). A “control share acquisition” is the acquisition, directly or indirectly, by any person of ownership of issued and outstanding control shares. See id. at § 61-6-3(1)(a)(i). Mergers and share exchanges are generally exempted. “Control shares” are those that, but for operation of the Control Shares Act, would bring the acquiring person’s voting power within any of the following three ranges: (a) 20% to 331/3%; (b) 331/3% to 50%; or (c) 50% or more. See id. § 61-6-2(1). The corporation’s directors or shareholders may elect to exempt the corporation’s stock from the Control Shares Act by adopting a provision to that effect in the articles of incorporation or in the corporate bylaws. See id. at § 61-6-6.

In fact, when faced with a cooperative board that favors a particular control share acquisition, a board (through the exercise of the board’s appropriate fiduciary duties) will often adopt appropriate bylaw revisions to exempt the corporation from the Control Share Act prior to the consummation of the applicable control share acquisition. Absent board cooperation, however, the restrictions imposed by the Control Share Act are almost insurmountable.

Voting on Control Share Rights
A corporation’s shareholders must decide the status of voting rights for control shares acquired in a control share acquisition at the first shareholder’s meeting following the acquisition. This meeting may be the next annual meeting or the next special meeting. The acquiring person, however, may accelerate the decision by requiring the corporation to hold a special shareholder’s meeting to consider the voting rights’ status. To require a special meeting, the acquiring person must: (a) file an acquiring person statement with the corporation; and (b) agree to pay the meeting expenses. See id. at § 61-6-8(1).

Under section 61-6-7, the acquiring person statement must include several items of information.

The acquiring person statement shall set forth all of the following: (1) the identity of the acquiring person and each other member of any group of which the person is a part for purposes of determining control shares; (2) a declaration that the acquiring person statement is given pursuant to the Control Share Act; (3) the number of shares of the issuing public corporation owned (directly or indirectly) by the acquiring person and each other member of the group; (4) the range of voting power under which the control share acquisition falls or would, if consummated, fall; and (5) if the control share acquisition has not taken place: (a) a description in reasonable detail of the terms of the proposed control share acquisition; and (b) a statement by the acquiring person supported by reasonably detailed facts that the proposed control share acquisition, if consummated, will not be contrary to law, and that the acquiring person has the financial capacity to make the proposed control share acquisition.

Id. at § 61-6-7. In addition to the acquiring person statement, the acquiring person must give an undertaking to pay the corporation’s special meeting expenses within ten days after the meeting is held. See id. at § 61-6-8(1). If the acquiring person complies with these requirements, the corporation’s directors must call a special meeting to consider the voting rights to be accorded to the acquiring person’s shares. Id.

As previously mentioned, to be approved, shareholders holding a majority of the corporation’s shares that are not “interested shares” must elect to permit the control shares to retain (or have restored) voting rights. “Interested shares” are shares held by not only the acquiring person, but also the target corporation’s officers and non-independent directors, i.e., employee directors. See id. at § 61-6-4. Therefore only those truly independent shareholders are able to vote their shares regarding any control share matters. In a corporation held primarily by insiders, the results are that a small minority may be given the power to make the final decision.

It is also important to emphasize that the acquiring person is authorized to demand that this meeting be held prior to the consummation of the applicable control shares acquisition. See Utah Code Ann. §§ 61-6-7&8. In connection with a tender offer for the acquisition of control shares, the acquiring person will generally condition the close of the tender offer on the requirement that the special meeting be held and that the shareholders agree to waive the Control Shares Act’s applicability.

Third Party Proxy Issues
The definition of a control share acquisition includes “the acquisition of power to direct the exercise of voting power with respect to issued and outstanding control shares, including the acquisition of voting power pursuant to a revocable proxy.” Id. at § 61-6-3(1)(a)(ii). The only exception to the revocable proxy inclusion is for revocable proxies solicited by the target corporation or the target corporation’s board of directors. See id. at § 61-6-3(1)(b). This restriction appears to prevent third parties from seeking hostile proxy contests without the target corporation’s board of directors’ cooperation in soliciting proxies.

Action by Shareholder’s Written Consent Permitted After 1992
In some instances, the proxy solicitation problem may be overcome by obtaining written consent from the target corporation’s shareholders rather than soliciting proxies. See Utah Code Ann. § 16-10a-704. Utah Code section 16-10a-704 permits corporations to take shareholder action without a meeting and without prior notice, so long as it is the type of action that could normally be taken at a meeting and the shareholders give written consent. Shareholders must give signed consent by the minimum number of votes that would be necessary to authorize the action at a meeting. See id. Any action taken by written consent of less than all shareholders must, however, comply with the further notice and delayed effectiveness provisions of section 16-10a-704(2).

In seeking action by written consent, attorneys should carefully review the charter documents for corporations existing prior to 1992. Utah Code section 16-10a-704 is subject to the limitations of section 16-10a-1704. This statute, passed in 1992, specifically provides that a corporation in existence prior to July 1, 1992, may not take action by the written consent of fewer than 100% of the shareholders entitled to vote unless a resolution providing otherwise has been approved either:

(a) by a consent in writing, setting forth the proposed resolution, signed by all of the shareholders; or (b) at a duly convened meeting of shareholders, by the vote of the same percentage of shareholders of each voting group as would be required to include the resolution in an amendment to the corporation’s articles of incorporation.

Id. at § 16-10a-1704(4).

Interested parties to a control shares acquisition should review the target corporation’s formation date and articles of incorporation to determine whether such resolutions exist.

Redemption Rights
If a target corporation’s shareholders do not vote to restore voting rights to the control shares, the corporation may, if its articles of incorporation or bylaws so provide, redeem the control shares from the acquiring person at fair market value. See id. § 61-6-11(2). Further, if the acquiring person fails to file an acquiring person statement, the corporation may, if its articles of incorporation or bylaws so provide, redeem the control shares at any time within 60 days of the acquiring person’s last acquisition of control shares. See id. § 61-6-11(1). This may be done regardless of the decision of the shareholders to restore voting rights. Control shares acquired in a control share acquisition are not subject to redemption, however, if an acquiring person statement has been filed and the shares have been accorded full voting rights. See id. § 61-6-11(2).

Dissenters’ Rights
Unless otherwise provided in the articles of incorporation or bylaws of a corporation, shareholders are also entitled to dissenters’ rights if the control shares are accorded full voting rights and the acquiring person has obtained a majority or more of control shares. See id. § 61-6-12(1). When shareholders have dissenters’ rights, the corporation’s board of directors must send notice as soon as practicable advising them of the facts and of their dissenters’ rights to receive fair market value for their shares. See id. § 61-6-12(2). Interested parties should check a corporation’s bylaws to determine whether dissenters’ rights are permitted or denied.

Other States’ Laws
A number of states have adopted takeover laws and regulations that purport to be applicable to attempts to acquire securities of corporations that are incorporated in those states or that have substantial assets, stockholders, principal executive offices or principal places of business in those states. To the extent that these state takeover statutes purport to apply to transactions by corporations not incorporated in such states, case law has held them to be generally unenforceable. In TLX Acquisition Corp. v. Telex Corp., 679 F. Supp. 1022 (W.D. Okla. 1987), a federal district court in Oklahoma ruled that the Oklahoma statutes were unconstitutional insofar as they apply to corporations incorporated outside Oklahoma because they would subject those corporations to inconsistent regulations. Similarly, in Tyson Foods, Inc. v. McReynolds, 700 F. Supp. 906 (M.D. Tenn. 1988), a federal district court in Tennessee ruled that four Tennessee takeover statutes were unconstitutional as applied to corporations incorporated outside Tennessee. This decision was affirmed by the United States Court of Appeals for the Sixth Circuit. In November 1988, a federal district court in Florida held, in Grand Metropolitan PLC v. Butterworth, that the provisions of the Florida Affiliated Transactions Act and Florida Control Share Acquisition Act were unconstitutional as applied to corporations incorporated outside of Florida. No. Civ. A. 88-40317 WS, 1988 WL 1045191 (N.D. Fla. Nov. 28, 1988). The Utah Control Shares Act, however, appropriately applies only to a corporation organized under Utah law. See Utah Code Ann. § 61-6-5(1).

Conclusion
Attorneys representing corporations that would qualify as an issuing public corporation (generally a Utah corporation with more than 100 shareholders) should carefully review such a corporation’s charter documents to determine if provisions relating to the Control Share Act should be incorporated therein. Failure to follow the Control Share Act may result in one’s clients unwittingly acquiring shares without voting rights. Additionally, Utah corporations that have not opted out of the Control Share Act will be more difficult to acquire, the results of which may result in lower valuations by potential acquirers. Many Utah corporations, however, may wish to keep tight control on whose crosshairs they are in and remain subject to the Control Share Act to help protect them from hostile takeover efforts. Utah issuing public corporations and the attorneys that represent them should determine now how best to apply the Control Share Act. What should not happen, however, is for the analysis to come too late.