Absent an agreement permitting majority shareholders to purchase the interest of minority shareholders,
the majority shareholders have no right to purchase the interests of the minority shareholders, or to force
the minority shareholders to sell. However, a new California case seems to reduce the risk to majority
shareholders in utilizing a "freeze-out" short-form merger, whereby the minority shareholders of a target
corporation ("T") who own in the aggregate 10% or less of T, are involuntarily cashed out of their investment.

It is structured as follows: The control group of shareholders (owning in the aggregate 90% or more of T)
forms an acquisition entity ("A"), in which the control group owns all of the stock. The stock of T is contributed
to A by the control group, so A owns 90% or more of T. Using the "short-form" merger statutes in California
(which do not require a shareholder vote, or all of the shareholders to receive the same consideration in the
merger), T then merges into A, with A as the survivor. The minority shareholders in T are cashed out, and
have no further interest in A.

There are limits on this concept. First, the minority shareholders must receive a fair price for their shares in T.
The statutory merger framework provides if necessary for a court-supervised appraisal process.

Second, the minority shareholders, in a common-control scenario (that is, where A and T are under common
control, such as in the case of a short-form merger), can in lieu of exercising their statutory appraisal rights
sue to enjoin the transaction, or to rescind it if it has already closed. However, the operative statute provides
that the court shall not restrain or rescind the transaction unless the court has made a determination that
"clearly no other remedy will adequately protect the complaining shareholder or class of shareholders". A
court may be reluctant to grant such extraordinary relief, particularly if the merger transaction has already
closed and the court is asked to "unscramble the egg".

Do the minority shareholders have any other recourse? California also has a strong tradition that the majority
shareholders of a California corporation owe an equitable fiduciary duty to the minority shareholders. Do
minority shareholders who object to the merger have a right to sue the majority shareholders for damages,
whether for breach of fiduciary duty or on some other theory?

That was the question faced by a California appellate court in Busse v. United PanAm Financial Corp.[1]

United PanAm Financial was a sub-prime lender of used car loans, which had been formed by one Guillermo
Bron in 1994. The company later went public, and before the Great Recession its stock traded as high as
$26 per share. However, the recession hit the company hard, and its stock dropped as low as $1.59 by 2008.
Bron, who controlled approximately 40% of the outstanding shares, decided that this was a good opportunity
to take the company private. A special committee of the Board negotiated a price of $7.05 per share with
Bron, below the book value of $8.54 per share. The merger was narrowly approved by the shareholders, and
subsequently closed. Busse and another dissident shareholder sued Bron for breach of fiduciary duty.

In a lengthy summary of relevant cases, the Court observed both before and after the enactment of the current
Corporations Code in 1975, California law had been clear that no such right to sue for damages existed in
situations not involving common control, since the dissident shareholders had the right to an appraisal. The
Court also found that in adopting the provision of California law applicable to common-control situations (giving
the dissident shareholders the additional right to sue to enjoin the transaction), the Legislature had not
recognized, nor intended to create by enacting a new statutory merger framework, a right to sue for damages
(whether on a theory of breach of fiduciary duty or some other theory).

While the merger in Busse was not a short-form merger, the case's rationale seems to apply to a short-form
freeze-out merger. A freeze-out merger does not allow the majority shareholders to cash out the minority
shareholders at an unfair price—the appraisal process[2] ensures that. But freed from the specter of possible
personal liability for alleged breach of fiduciary duty, majority shareholders who now seek to freeze-out their
minority brethren after Busse face significantly less risk.

[1] 222 Cal. App. 4th 1028 (2014).
[2] Furthermore, the California Supreme Court has held that an appraisal action can take into account any diminution in value of the shares due to a breach of fiduciary duty, Steinberg v. Amplica, Inc., 42 Cal. 3d 1198 (1986).

You're negotiating the sale of your 50% interest in your corporation to the holder of the other 50% interest. Don't forget about the liability you might have under any personal guaranties!

A personal guaranty is usually required in obtaining a bank loan or line of credit. Landlords will also typically ask for a personal guaranty of a lease. However, other creditors will try to lure business owners into signing personal guaranties. Business owners should beware of the "boilerplate" fine print in documents such as vendor credit applications (including credit card applications), as these documents often contain language under which the signer is agreeing to personally guaranty the obligations of the company.

Once a personal guaranty is given it is very difficult to negotiate a termination of that guaranty without paying off the underlying guaranteed obligation, since the creditor really has no incentive to let the guarantor "off the hook". In the context of a sale of an interest in the business, generally the selling party relies on an indemnity from the purchasing party to hold the selling party harmless from any liability on the guaranty. Of course, an indemnity is only as good as the person giving it.

The sale transaction itself might be (and probably will be) an event of default of the underlying guaranteed obligation. For example, a loan agreement or lease would typically provide that a change in ownership of the borrower or tenant would constitute an event of default. In those situations, the other party to the contract will need to be contacted about the sale.

Some guaranties are considered "continuing guaranties", in that they are meant to include the guaranty of future obligations of a debtor to the creditor—for example, future borrowings under a bank line of credit. A guarantor is allowed at any time to revoke a continuing guaranty, and is then only responsible for the amount outstanding at the time of revocation. However, revocation of a continuing guaranty will typically be an event of default of the underlying secured obligation.

Can a business be liable for tortious interference with contract when it acquires another business and then
terminates a contract to which the acquired business is a party?

At least in the case of an acquisition structured as a reverse triangular merger, the answer under California
law is "yes", according to the California appellate court in Asahi Kasei Pharma Corporation v. Actelion Ltd.[1].

In Asahi, a California corporation ("Target") had entered into a development and license agreement (the
"License Agreement") with a Japanese entity ("Patent Holder") to obtain U.S. and European regulatory
approvals for Patent Holder's drug ("Drug"), and to develop andmarket the Drug in those territories.

Another company ("Purchaser") marketed another drug which competed with the Drug. Purchaser had earlier
considered acquiring Target, but had not proceeded with an acquisition transaction. However, Target's new
License Agreement with Patent Holder caught the attention of Purchaser, and Purchaser began to explore a
possible acquisition of Target.

During the due diligence process, Purchaser made the determination that if an acquisition was effected, it
would not go ahead with the License Agreement for the Drug, as that might result in pricing pressure for its
competitive drug.

Purchaser and Target signed a definitive agreement providing for the pending acquisition. The proposed
transaction was structured as a reverse triangular merger--whereby Purchaser formed a new wholly-owned
subsidiary, which would be merged into Target (with Target's thereafter becoming a wholly-owned subsidiary
of Purchaser).

Between the signing of the merger agreement and the closing of the merger, Patent Holder on a number of
occasions sought assurance from the merger parties that the Drug would continue to be marketed under the
License Agreement following the consummation of the merger. Although Purchaser had already made a
decision not to so continue, Purchaser had Target respond that there had been "no decision" made with
respect to the fate of the Drug; in another communication, a key executive of Purchaser stated that there
was an intention to proceed under the License Agreement.

Thereafter, the merger closed, and Patent Holder was notified of Purchaser's intention to discontinue
development. Patent Holder notified Target that Target was in breach of the License Agreement because
Target had failed to confirm prior to the change in control that Purchaser would not interfere in Target's
obligations under the License Agreement. In subsequent termination discussions, Purchaser claimed its
decision to discontinue was due to safety issues, and threatened to report these safety issues to regulatory
authorities (despite the fact that a subsequent required clinical report to the FDA stated there were no safety
issues).

Patent Holder then terminated the License Agreement, and sued Purchaser and its executives for tortious
interference with contract. At trial, and after various post-trial motions, Patent Holder was awarded a judgment
in excess of $400,000,000, including over $30,000,000 of punitive damages.These damages were in addition
to other damages recovered by Patent Holder from Target in a separate arbitration for breach of contract.

One of the issues on appeal was whether the defendants could be liable for tortious interference with the
License Agreement. A party is always free to breach a contract to which it is a party; in that event, the party
may be liable in damages to the other party in contract, but not in tort. Punitive damages are only recoverable
for tort claims.

Purchaser argued that to have potential liability, the interfering party must be a "stranger" to the contract; that
it was not a stranger after having acquired Target; and that its advising its subsidiary to breach the contract was
subject to a privilege.

The court disagreed, and held that a parent corporation and its executives could be liable for tortious interference
with contract where they interfered with the contract of its subsidiary. While the defendants did have a qualified
privilege which they could assert as an affirmative defense, such privilege did not apply if the defendants used
improper means to interfere, which meant intentional misrepresentation, concealment or extortion. Here, the
improper means were found to be present.

Asahi is the typical "bad facts make bad law" type of case. Acquirers of businesses need to avoid the fact pattern
in Asahi to avoid potential tort liability for terminating contracts as part of a business acquisition.

While in some cases there may be good reasons for structuring a transaction as a reverse triangular merger, in
this case structuring the acquisition as a reverse triangular merger made all of the difference in the outcome.
Had Purchaser structured the acquisition as an asset sale, it would have been assigned Target's rights under
the License Agreement, and as a contracting party could not have been liable for tortious interference with the
contract.

[1] 222 Cal. App. 4th 945 (2013).

DO think about your exit strategy well in advance. Well-run businesses sell for higher multiples than poorly-run businesses do.

DO start assembling your team of professional advisors prior to starting a sale process.

DO have your financial advisor or accountant prepare a recast EBITDA (company earnings before interest, taxes, depreciation and amortization) analysis, showing what cash flow your business would generate in the hands of a buyer--but be realistic in the adjustments you make.

DO sign a Confidentiality Agreement (also sometimes referred to as a Non-Disclosure Agreement) with each prospective buyer before you provide any proprietary or confidential information about your company, including financial information.

DON’T be unrealistic about what your business is really worth. Remember, your business only has value beyond its net liquidation value if the buyer is confident it will receive a reasonable rate of return (cash flow) on the price the buyer will be paying. There might be ways, such as an “earn-out” (seller’s sharing with buyer on post-closing results) that can bridge the gap between the buyer’s and seller’s price expectations.

DO get advice from your advisors about the structure of the transaction. Remember, what’s important is how much of the purchase price you will be able to keep after you pay your taxes.

DON’T sign a letter of intent, even one that purports to be “non-binding”, without having it reviewed by legal counsel who is experienced in mergers and acquisitions work.

DON’T use a form contract to handle the sale. Although a lawyer uses his or her own form as a good starting point to prepare a purchase and sale agreement, every deal is different, and any form ought to be viewed as just the starting point in drafting the deal. Getting paid by the seller is one thing; getting to keep the sales price and not have to refund it to the buyer is another.

DON’T assume that an escrow company can handle the sale of your company without the involvement of a lawyer. Many business owners, even in “seven-figure” deals, make the mistake of thinking that an escrow agent will “protect” them in the sale. Escrow agents are neutral parties who perform ministerial functions such as UCC filings, bulk transfer compliance, etc.

DO fully cooperate with the buyer in the buyer’s due diligence investigation of your company. If there are potential issues and contingent liabilities, it is better to deal with them as a part of the sales process, rather than in a dispute after the sale closes.