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CALIFORNIA CORPORATE & SECURITIES LAW

I Deliver Some Round Observations About California’s Rounding Rule

Yesterday’s post concerned various actions that a California corporation may pursue in lieu of issuing fractional shares.  I left for today the subject of rounding.  Section 407 of the Corporations Code expressly permits rounding to the nearest whole share if the fraction of a share that any person would otherwise be entitled to receive is less than .005 (1/2 of 1%) of the total shares that person is entitled receive in a merger or conversion.  In these situations, the corporation may also simply disregard any fractions.

The reference to “total shares” in the statute is somewhat ambiguous.  Does it refer to the total whole number of shares that a person is entitled to receive in a merger or the total shares (including fractions of shares).  If, for example, a person is entitled to receive 80.4 shares in a merger, the .4 fraction represents .005 of the total whole number of shares entitled to be received (i.e., 80) but .00497512 of the total number of shares (i.e., 80.4).  This small difference is nonetheless significant because rounding or disregarding would not be permitted in the former case but would be permitted in the latter.  Another problem with the statute is that it requires the corporation to determine whether rounding is permitted on a shareholder-by-shareholder basis.  As a result, rounding could be permitted in the case of some shareholders but not others.

“I will a round unvarnished tale deliver”
Othello, Act I, Scene 3

When the current law was being drafted, Bill Holden, who for many years was counsel in the Secretary of State’s office, suggested that Section 407 explicitly authorize both rounding and the disregarding of fractions:

Harold, a fairly common provision of merger agreements with respect to the conversion of shares is to wholly disregard fractions of a share resulting from the conversion.  We have accepted such agreements notwithstanding present Section 1113 on a de minimis theory.  However, your Sections 1101(f) and 407, unlike present law, specifically apply to merger agreements and would be more difficult to overlook.

Since the agreement is approved by the shareholders, I see no reason why a merger agreement may not provide for wholly disregarding fractional shares.

. . . Another variation frequently seen in merger agreements calls for rounding of fractions to the nearest whole share.  This likewise would not be permitted by your Section 407.

Memorandum dated Oct. 9, 1974 from Bill Holden to Harold Marsh Jr.

The title of today’s post uses “round” the sense of being blunt as when Polonius says to Queen Gertrude “Pray you be round with him [Hamlet]”.  Hamlet, Act IV, Scene 5.

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