Control Share Cashout Provisions

Discussion

Control share cashout statutes give dissident shareholders the right to "cashout" of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price. Maine, Pennsylvania, and South Dakota all have cashout provisions.

South Dakota's cashout provision, triggered when a shareholder increases his stake in the company to a majority of shares, is part of its control share acquisition law. Under South Dakota law, if an acquirer's voting rights are restored, the acquirer then has the responsibility of purchasing, at fair market price plus interest , all remaining shares from owners who decide to cashout. Pennsylvania's cashout threshold level is 20 percent, while Maine's provision is triggered at 25 percent.

Cashout provisions may be beneficial because they pre-vent two-tiered tender offers. If shareholders are allowed to cashout, they are assured a fair price, and may also decide for themselves if holding their investment under new management is in their best interest.

However, cashout provisions also have a strong antitakeover effect, as an acquirer seeking partial control of a company must be prepared to purchase all company shares, should the remaining shareholders exercise their options to sell. Such a requirement adds a possible expense that many investors cannot afford. Even though the threshold levels on the three existing cashout statutes do not fall below 20 percent of outstanding shares, and therefore allow for considerable investment before the provisions are triggered, the statutes nevertheless serve as a strong deterrent against takeovers. A fair price provision with a disinterested majority vote requirement seems a far more equitable device to effect a business combination and ensure a fair price for shareholders. Therefore, evaluate proposals to opt out of control share cashout statutes on a case-by-case basis.