Opinion ID: 2634628
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Heading: Colorado Dissenters' Rights Act

Text: The Colorado Dissenters' Rights Act sets forth a special statutory procedure by which a shareholder may dissent from certain corporate actions and obtain payment of fair value for its shares; such corporate actions include a sale of the corporation's assets. § 7-113-102(1)(c) & (d). We refer to this procedure as the statutory appraisal remedy.
This special statutory design sets out a series of deadlines and procedures to ensure that the corporation can timely pursue new opportunities while minority shareholders are promptly compensated for the fair value of their shares. If a proposed corporate action giving rise to dissenters' rights is submitted to a vote at a shareholder meeting, the corporation must give notice to all shareholders. § 7-113-201(1). The notice must include a statement that all shareholders are entitled to dissent. Id. Before the vote is taken, shareholders who dissent must give written notice of their intent to demand payment in the event the proposed corporate action is effectuated. § 7-113-202(1)(a). If the corporate action is subsequently authorized, the corporationno later than ten days after the effective date of the corporate actionmust give written notice to all shareholders who are entitled to demand payment. § 7-113-203(1). The notice must include, among other matters, a date by which the corporation must receive the payment demand. § 7-113-203(2)(e). This date cannot be less than thirty days after this notice is given. Id. Upon receiving such notice, the dissenting shareholder must demand payment. § 7-113-204(1)(a). After the effective date of the corporate action, the shareholder has only the right to receive fair value for the shares. § 7-113-204(2). Fair value means the value of the dissenter's shares immediately before the effective date of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action except to the extent that exclusion would be inequitable. § 7-113-101(4). The demand for payment is irrevocable unless: (1) the effective date of the corporate action does not occur within sixty days after the date set by the corporation; or (2) the corporation fails to make payment within sixty days after the date set by the corporation for receiving the payment demand. § 7-113-204(3). Upon the effective date of the corporate action, or upon receipt of the payment demand, whichever is later, the corporation must pay each dissenting shareholder the amount that the corporation estimates to be the fair value of the shareholder's shares. § 7-113-206(1). If a dissenting shareholder is dissatisfied with the payment, it must give written notice of its estimate of fair value. § 7-113-209(1). Within sixty days after receiving the dissenting shareholder's estimate of fair value, the corporation may commence an action in court to determine the fair value of the shares. § 7-113-301(1). If the corporation does not commence the proceeding within this time period, it must pay each dissenting shareholder the amount demanded. Id. The jurisdiction of the court is plenary and exclusive § 7-113-301(4). [5] The dissenting shareholder is entitled to fair value for its shares as determined by the court. § 7-113-301(5).
Once the shareholder elects to dissent and demand payment, the Act prohibits a challenge to the corporate action except for a narrow exception for unlawful or fraudulent conduct. Section 7-113-102(4), also known as the exclusivity provision, states: 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 or the corporation. § 7-113-102(4) (emphasis added). Whether the exception permits a dissenting shareholder to bring an action for compensatory damages in addition to invoking the statutory appraisal remedy is a matter of first impression in this court. Thus, we now turn to the Act and case law to construe this provision. In 1993, the General Assembly repealed the entire Colorado Corporate Code and enacted the Revised Model Business Corporation Act of 1984 (MBCA). Pueblo Bancorporation, 63 P.3d at 368. In doing so, the General Assembly adopted the MBCA's exclusivity provision. Compare § 7-113-102(4), with Model Bus. Corp. Act § 13.02(b)(1984). The official comment to the MBCA explains that the Act basically adopts the New York formula as to exclusivity of the dissenters' remedy. . . . Model Bus. Corp. Act § 13.02 cmt. at 1366 (1984). The MBCA drafters designed the exclusivity section to recognize and preserve the principles that have developed in the case law of Delaware, New York and other states with regard to the effect of dissenters' rights on other remedies of dissident shareholders. Id. at 1367. The official comment summarizes the principles that developed from this case law: The [appraisal] remedy is the exclusive remedy unless the transaction is unlawful or fraudulent. . . . If the corporation attempts an action in violation of the corporation law on voting, in violation of clauses in articles of incorporation prohibiting it, by deception of shareholders, or in violation of fiduciary duty . . . the court's freedom to intervene should be unaffected by the presence or absence of dissenters' rights under this chapter. Id. at 1366. The New York formula provides that appraisal is the exclusive remedy, except that an individual may bring a proceeding in equity when corporate action is alleged to be fraudulent or illegal. Breed v. Barton, 429 N.E.2d 128, 129-31 (N.Y.1981); Theodore Trust U/A Dated December v. Smadbeck, 277 A.D.2d 67, 717 N.Y.S.2d 7, 8 (2000). [6] The dissenting shareholder must seek some form of equitable relief; it is not sufficient to plead a cause of action over which equity has jurisdiction. Walter J. Schloss Assocs. v. Arkwin Industries, Inc., 61 N.Y.2d 700, 472 N.Y.S.2d 605, 460 N.E.2d 1090, 1090, (1984) (adopting dissent of Walter J. Schloss Assocs. v. Arkwin Industries Inc., 90 A.D.2d 149, 455 N.Y.S.2d 844, 847, 850 (1982)(Mangano, J., dissenting)). Moreover, dissenting shareholders cannot obtain relief in the form of compensatory damages. Breed, 444 N.Y.S.2d 609, 429 N.E.2d at 130. Rather, any monetary recovery, if available at all, can only be ancillary to a grant of some form of equitable relief from the corporate action. Id. at 131; Burke v. Jacoby, 981 F.2d 1372, 1380 (2d Cir.1992) (interpreting New York Law and dismissing the dissenting shareholder's complaint because it made no attempt to obtain traditional equitable relief but only requested compensatory and punitive damages). The New York Court of Appeals explained that the policy behind prohibiting an action for compensatory damages, in addition to invoking the statutory appraisal remedy, is to avoid duplicate damages. The appraisal action is the forum for full monetary recovery of the dissenting shareholder's shares: Allowing the prosecution of a legal action for damages after the exercise of the right of appraisal would be unnecessarily duplicative in that full and proper monetary recovery of the fair value of the dissenters' shares may be obtained in the appraisal proceeding. Breed, 444 N.Y.S.2d 609, 429 N.E.2d at 130. New York and Delaware share the same basic principle that the exclusivity exception to the statutory appraisal remedy permits equitable relief and does not allow a separate claim for compensatory damages. See Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983); Ryan v. Tad's Enters., Inc., 709 A.2d 682, 698-99 (Del.Ch.1996). Delaware has a long history of equitable actions in the corporate setting. Where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved, a dissenting shareholder may bring an equitable action. Weinberger, 457 A.2d at 714. [7] In Delaware, a dissenting shareholder may receive rescissory damages in an equitable action. Id. In this situation, the court awards rescissory damages when a traditional form of equitable relief, like rescission, is not feasible. [8] Nagy v. Bistricer, 770 A.2d 43, 56 (Del.Ch.2000) (Only in an equitable action can [the plaintiff] possibly obtain rescission or rescissory damages.). Nevertheless, where the dissenting shareholder seeks an appraisal and equitable relief, the Delaware court limits the dissenting shareholder to a single recovery judgment. Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1191 (Del.1988); see also William M. Fletcher, Cyclopedia Corporations § 5906.30 (perm.ed., rev.vol.2000). Moreover, Delaware law, like New York law, prevents a dissenting shareholder from maintaining an action for compensatory damages in addition to the statutory appraisal remedy. The MBCA specifically states that it follows the New York formula. The official comment referred to the court's equitable powers when it stated that the court's freedom to intervene should be unaffected by the presence or absence of dissenters' rights. § 13.02 at 1366. In making this statement, the drafters were summarizing the principles from the New York and Delaware cases that only an equitable action may be brought under the exception to the exclusivity provision of the appraisal statute, not an additional claim for compensatory damages to supplement the appraisal remedy. Grace v. Rosenstock, 228 F.3d 40, 50 (2d Cir.2000) (stating that New York only permits an appropriate equitable action under the illegality or fraud exception to the exclusivity provision). In adopting the MBCA, which in turn adopted New York's exclusivity provision, our General Assembly confirmed that the statutory appraisal remedy provides the dissenting shareholder full and proper monetary recovery for the value of its shares. Breed, 444 N.Y.S.2d 609, 429 N.E.2d at 130. Additionally, by adopting this special statutory proceeding which contains strict deadlines and detailed procedures, the General Assembly intended to allow corporations to continue with business even though minority shareholders dissented from the corporate action. In order to provide a speedy and fair resolution, the legislature provided the appraisal remedy. In doing so, it prevented dissenting shareholders from challenging the corporate action based on the common law, unless such actions were unlawful or fraudulent and merit equitable relief. This construction of the exception to the exclusivity provision conforms to the intent of the General Assembly. § 7-113-102(4).