California Corporations Code Section 1312(a) provides:
No shareholder of a corporation who has a right under this chapter [Cal. Corp. Code Chapter 13] to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization.
That would seem pretty limiting. One might even conclude that the statutory remedy is "exclusive". Section 1312(b), however, does provide an exception when one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger.
In Li v. ArcSoft, Inc., No. 19-CV-05836-JSW, 2024 WL 1972891, at *1 (N.D. Cal. May 3, 2024), the plaintiff sued for damages that arising from or related to a management-led buyout of the plaintiffs' shares. The defendants argued that Section 1312 was a complete bar to relief. Based upon the plain words of Section 1312(a) (apparently it was not argued that Section 1312(b) was applicable), the defendants seemingly had a winning position. The Judge, however, denied summary judgment on that basis and the case went to trial. The jury found for the plaintiffs and the defendants renews a pending motion for judgment as a matter of law.
U.S. District Court Judge Jeffrey S. White was unpersuaded, he found "that California courts are likely to permit an exception to Section 1312 where the facts underlying a plaintiff's claim of fraud or breach of fiduciary duty were unknown to the plaintiff at the time of the transaction". The defendants were out of luck because the jury found that all of the material facts underlying plaintiffs’ breach of fiduciary duty, negligent misrepresentation, and concealment claims were not known to plaintiffs before the buyout.
In fact, a California Court of Appeal in a published opinion has brooked no such exception:
Appellants maintain that appraisal is not the exclusive remedy of a dissenting shareholder who has been defrauded. . . . While the language in section 1312, subdivision (a), taken at face value, might possibly be susceptible to such interpretation, we do not regard it as the most reasonable one. Under prior, but substantially similar versions of the statute (i.e., Corp. Code, Section 4123, and Civ. Code, Section 369, (17)), it was the general rule that “recovery of the fair market value of shares is the only remedy of a dissenting stockholder except that he may bring an action to test whether the merger or consolidation was approved by the required number of shares.”… See also, Jackson v. Maguire (1969) 269 Cal. App.2d 120, 131 [75 Cal. Rptr. 16]; Giannini Controls Corp. v. Superior Court (1966) 240 Cal. App.2d 142, 154 [49 Cal. Rptr. 643]; Beechwood Securities Corp. v. Associated Oil Co. (9th Cir. 1939) 104 F.2d 537; . . .
That the Legislature intended to maintain the exclusivity of the appraisal remedy for dissenting shareholders is apparent not only from its basic reenactment of former section 4123 in subdivision (a) of section 1312, but also from its enactment of subdivisions (b) and (c) which were not found in former versions of the statute and which expressly permit shareholder litigation other than an appraisal action where one of the merging corporations is controlled by the other or where the corporations are under common control. The creation of this limited exception suggests that for shareholders not falling within the categories therein specified, such as appellants, the appraisal process remains their exclusive remedy.
Sturgeon Petroleums, Ltd. v. Merchants Petroleum Co., 147 Cal. App. 3d 134, 139-140, 195 Cal. Rptr. 29, 32 (1983) (footnote omitted). While it is true that courts in two subsequent California decisions left the proverbial door open to an exception, they did not hold that such an exception exists. See Steinberg v. Amplica, 42 Cal.3d 1198, 1207 (1986) (limiting ruling to circumstances of “a minority shareholder who is aware of the facts underlying his claim of breach of fiduciary duty” prior to merger); and Singhania v. Uttarwar, 136 Cal. App. 4th 416, 434-35 (2006) (declining to address whether statute applies if “the facts of [fraud or breaches of fiduciary duty] were unknown to the shareholder before the buyout”). Judge White cites these two more recent, but inconclusive cases, he makes no mention of the earlier decision which directly addresses the question.
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