Opinion ID: 1907537
Heading Depth: 1
Heading Rank: 3

Heading: The Rescission Issue

Text: At first glance, the relevant provisions of the BCA on rescission rights present a conflict. (1) A corporation may terminate the right of a dissenting shareholder to be paid fair value if a proposed corporate action is abandoned or rescinded. N.J.S.A. 14A:11-4(1)(e). (2) A dissenting shareholder is one who has made demand for payment of shares after notice of the effective date of the corporate action. N.J.S.A. 14A:11-3(1). (3) Notice of the effective date of the action shall be given by the corporation within 10 days after the date thereof. N.J.S.A. 14A:11-2(2) (emphasis added). The word proposed in 11-4(1)(e) creates the confusion. Because a shareholder's demand for payment of fair value must be made after the effective date of the corporate action, it would appear to follow that rescission of the corporate action, thereby terminating the shareholder's right to demand payment, may also take place after the effective date of the action. Yet, 11-4(1)(e) provides that a dissenting shareholder's right to payment of fair value for his shares may be terminated if the proposed corporate action is abandoned or rescinded[.] (Emphasis added.) The language of 11-4(1)(e) appears intrinsically inconsistent. Ordinarily, one does not rescind a proposed action. Moreover, if the rights of a dissenting shareholder do not arise until after the effective date of an action, what rights are there to terminate if the proposed action has never taken place? Still, the fair value recipients argue that the plain meaning of the word proposed in 11-4(1)(e) allows the corporation to rescind a disputed action only prior to its effective date. They rely in part on New York cases interpreting appraisal provisions of the New York Business Corporation Law (the New York Act) that held that rescission of a triggering corporate action before its effective date divests appraisal rights. [4] See N.Y. Bus. Corp. Law § 623 (McKinney 1996). None of those cases dealt with the precise issue before us, i.e., whether rescission of a corporate action after its effective date may divest appraisal rights. On the contrary, the New York cases dealt with corporate actions that had yet to be consummated and the shareholders' premature application for appraisal rights. See, e.g., In re Valando, 67 Misc. 2d 515, 323 N.Y.S. 2d 608, 609 (Sup.Ct. 1971) (holding that shareholder's right to receive payment for shares of stock under dissent statute does not vest unless objectionable corporate action taken); Standard Brewing Co. v. Peachey, 202 Misc. 279, 108 N.Y.S. 2d 583, 588 (Sup.Ct. 1951) (holding that shareholders have no right to appraisal and payment for stock under proposed corporate action). But see In re McKinney, 306 N.Y. 207, 117 N.E. 2d 256, 259 (1954) (appearing to contemplate rescission after action taken). Our goal in statutory construction is to determine the intent of the Legislature, which is ordinarily most clearly indicated by the statutory language. Medical Soc'y v. Department of Law & Pub. Safety, 120 N.J. 18, 26, 575 A. 2d 1348 (1990). However, a construction that will render any part of a statute inoperative, superfluous, or meaningless, is to be avoided. State v. Reynolds, 124 N.J. 559, 564, 592 A. 2d 194 (1991). Interpreting the words abandoned and rescinded in section 11-4(1)(e) to apply only to a proposed corporate action would entirely nullify 11-4(1)(e) as a means for terminating a shareholder's right to demand payment of fair value for shares because a shareholder may only demand such payment after the effective date of the corporate action pursuant to 11-2(3). We believe that construction does not comport with the Legislature's intent in drafting those provisions. Of course, one might attribute a generic meaning to the words dissenting shareholders in 11-4(1)(e) as those who have indicated an initial intent to dissent from the proposed action. But if that were so, there would be no reason for the provisions of 11-4(2) that condition any termination of appraisal rights on an award to the dissenting shareholder of any intervening preemptive rights ... dividend[s] or distribution[s]. Because the usual time cycles for dividends are at least quarterly, the statute appears to contemplate the passage of a significant period of time between the triggering corporate action and termination of appraisal rights. The legislative history of 11-4(1)(e) discloses that the word proposed appears in early drafts of the act, which were drawn from the Model Business Corporation Act (the Model Act). See N.J.S.A. 14A:11-4 Source or Reference. The minutes of the New Jersey Corporation Law Revision Commission's 104th meeting show that the BCA later moved away from the Model Act's time sequence to its own unique sequence, based in part on the then-existing New York Act. The Commission voted that the BCA be amended to ... insert a new subsection (2) [authorizing dissent and appraisal rights] patterned after § 623(b) of the New York Act, except that the notice mentioned in § 623(b) should be sent after the effective date of the [corporate] action rather than after the shareholders' authorization date. See New Jersey Corporation Law Revision Commission, Minutes of 104th Meeting (March 11, 1965). Notably, the BCA's current time frame is unlike that of both the former Model Act and the current New York Act. The BCA and the Model Act are alike in that both require a non-consenting shareholder to complete two steps in order to perfect the right to be paid fair value: the shareholder must first notify the corporation of the intention to dissent and then must serve demand on the corporation for the payment of fair value. Under section 74 of the Model Act, step two is accomplished by the shareholder making written demand for payment within ten days after the vote authorizing the proposed corporate action; thus, the right to fair value may be perfected before the effective date of the corporate action. In New Jersey, however, step two takes place after the effective date. See N.J.S.A. 14A:11-2(3). Notably, New York's current statute is both different and similar to the BCA. New York requires that the shareholder file a notice of election to dissent, but does not require the shareholder to file an additional notice of demand for fair value. See N.Y. Bus. Corp. Law § 623(c). Significantly, New York has since amended section 623 to delete the reference to a corporation having rescinded a proposed act. [5] The rhetorical question thus posed by the company is why does the BCA even mention rescission rights if there is no right to rescind after the triggering action is taken: [S]ince [a] dissenter['s] right to be paid fair value does not exist until after the completion of corporation action, New Jersey corporations would be left with a classic paradox and meaningless remedy, i.e., there would be no need to rescind prior to the completion of corporation action and no ability to do so afterward. In effect, a corporation could rescind only when it didn't need to. Certainly the Legislature never intended such a Catch 22 type result. It is a venerable principle that a law will not be interpreted to produce absurd results. K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 325 n. 2, 108 S.Ct. 1811, 1835 n. 2, 100 L.Ed. 2d 313, 345 n. 2 (1988) (Scalia, J., concurring in part and dissenting in part). Thus, our function is to make sense of a statute. In re Executive Comm'n on Ethical Standards Re: Appearance of Rutgers Att'ys, 116 N.J. 216, 221, 561 A. 2d 542 (1989). It would make little sense to provide for termination of appraisal rights but only if appraisal rights have not arisen. On balance, we believe that the Legislature intended that a corporation be given a reasonable right to rescind corporate action that has triggered appraisal rights. After all, the shareholders' preliminary notice of intent to dissent (provided in 11-4) is just that. Appraisal rights do not vest unless there is a demand under 11-2(3). It is one thing to forge ahead with the restructuring of a corporation if 2% of shareholders demand appraisal rights and quite another to be locked into an action if 49% of shareholders actually demand these rights. This is the common sense of the situation and the interpretation that we believe our Legislature intended. We cannot accept, however, Wheaton's argument that the Legislature intended to allow rescission of a corporate action any time after its effective date. Wheaton made its decision to rescind the 1991 restructuring some three and one-half years after the restructuring was completed. Although 11-4(1)(e) places no time restraint on the corporation's ability to rescind and terminate the dissenting shareholder's appraisal rights, principles of logic and statutory interpretation would require the corporation to rescind its action within a reasonable time after the effective date. See In re Hake, 285 A.D. 316, 136 N.Y.S. 2d 817, 821 (holding that [i]f the corporate officers and directors fail to act within a reasonable time and resolution is not rescinded, an order for appraisal and payment for the dissenting stockholder's stock should be made.), appeal dismissed, 308 N.Y. 940, 127 N.E. 2d 90 (1955); Raymond Proffitt Foundation v. E.P.A., 930 F. Supp. 1088, 1100 (E.D.Pa. 1996) (holding that when statute does not provide time for prescribed act court must infer that Legislature intends that act be done within reasonable time). Were it otherwise, the interminable termination right would become a one-way street for a corporation to play the market. If the fair value of the company's shares goes up between demand and valuation, a dissenting shareholder may not, without consent of a company, withdraw a demand for fair value, 11-5(1), and take the higher current value. On the other hand, if the company's fortunes wane and share values go down, the company might, at any time, rescind the action and saddle dissenting shareholders with the lower current values. This is simply not fair. Once shareholders make a demand for payment, they surrender all rights as shareholders. N.J.S.A. 14A:11-3(2). They are outsiders without a voice in company affairs. In addition, they will have wasted time, money, and emotional resources in the appraisal contest. In assessing a passage of time that is both reasonable and equitable to the parties involved, a court must consider the corporation's financial position and the consequences of forcing payment of fair value, as well as the prejudice to the dissenting shareholders by allowing rescission. In this case, we need not debate what is a fair balance of the factors because both parties now seek the appraisal remedy.