Fairness Hearing – Frequently Asked Questions and Answers
What is a fairness hearing?
The Commissioner of the Department of Financial Protection and Innovation (Commissioner) is authorized under Corporations Code section 25142 to hold a hearing on the fairness of the terms and conditions of proposed issuances of securities, or proposed delivery of other consideration, in exchange for one or more outstanding securities, claims, or property interests except in transactions where consideration is cash only.
Which exemptions can be perfected through a fairness hearing?
- Exemption from registration under Section 3(a)(10) of the Securities Act of 1933.
- Exemption from certain requirements for corporate merger transactions. (Corp. Code, §§ 1101, subd. (b), 1101.1 & 1113, subd. (c)).
- Exemption allowing a mutual benefit corporation to change its status to that of a public benefit corporation or a religious corporation if approved by the members. (Corp. Code, § 7813.5, subd. (b)(i).)
- Exemption from the requirement for approval by 90 percent of the outstanding shareholders before or after the board approves the sale, lease, conveyance, exchange, transfer, or disposal of all, or substantially all, of its assets. (Corp. Code, § 1001.)
What is an example of a proposed exchange?
- Recapitalization or an “exchange reorganization” as defined in Corporations Code section 181, subdivision (b);
- Reorganizations between affiliated persons; and,
- Combinations of unaffiliated businesses, including mergers, acquisitions, consolidations and sales of assets, including a “sale of assets reorganization” as defined in Corporations Code section 191, subdivision (c).
Who can request a fairness hearing?
Any issuer that has a sufficient nexus with California may request a fairness hearing. Jurisdictional requirements may be satisfied where an issuer has a principal office located in California or shareholders domiciled in California.
How does one request a fairness hearing?
A request for a fairness hearing must be made by filing an application under Corporations Code section 25142. In addition, if the transaction is subject to the Corporate Securities Law of 1968 (Corp. Code, § 25000 et seq.), the issuer must also file an application for qualification by permit under Corporations Code section 25121.
For instructions on how to file application by qualification with the Department see Rules 260.110, 260.121 and 260.142.
How much does a fairness hearing cost?
The costs associated with a California fairness hearing are relatively modest. In addition to the issuer’s own professional fees and costs, the following will need to be paid to the Commissioner:
- $2,500 permit application fee under Corporations Code section 25608
- Actual expense of noticing and holding the hearing
- Court reporter costs
What kind of preparation is required for the hearing?
Rule 260.140.60 requires solicitation materials to be filed with the Commissioner before the hearing even though the materials cannot be mailed until after the hearing. The issuer may not solicit shareholder proxies or consents before the issuance of a permit, as the very purpose of the hearing is to determine whether the exchange is fair.
An fairness opinion from a financial advisor as to the fairness of the transaction from a financial point of view or an independent appraisal is not required. However, they may help establish the fairness of the proposed transaction. If a fairness opinion is filed as part of the application, the representative of the advisor giving the opinion or appraisal should personally attend at the hearing.
Are fairness hearings public?
Yes. The Commissioner posts notice of the hearing in the office in which the hearing will take place no less than 10 days before the hearing; and, the requestor is charged with serving notice of the hearing on all interested parties. All persons to whom an exchange is proposed have a right to attend the fairness hearing.
What happens at a fairness hearing?
Typically, fairness hearings are conducted at an office of the Department of Financial Protection and Innovation by an employee (usually an attorney) designated by the Commissioner to act as the hearing officer. Sworn witnesses may be called to give evidence and are subject to examination by interested parties. Parties may be represented by legal counsel. A court reporter will record the proceedings. Upon determining that the proposed exchange is fair, just, and equitable to the parties, the hearing officer will issue the permit.
During the COVID-19 emergency, the Department is holding virtual Fairness Hearings. Issuers are responsible for providing a virtual hearing platform where a court reporter can swear in witnesses, witnesses can provide video testimony before the Department’s Hearing Officer, and a complete transcript of the hearing can be created and provided to the Department.
For more information on fairness hearings, please contact Assistant Chief Counsel Theresa Leets at (213) 576-7590 or Theresa.Leets@dfpi.ca.gov.
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