Securities Regulation Daily Wrap Up, CORPORATE GOVERNANCE—9th Cir.: Appraisal-related question certified to CA high court, (Dec 4, 2025)

By Anne Sherry, J.D.

Weighing the policy concerns of state statute with equitable considerations is a delicate task better suited to the California Supreme Court.

Do the appraisal provisions of California corporate law bar a shareholder from attacking the validity of a merger even if the shareholder didn’t learn of the basis for such an attack until after the merger was consummated? Wary of deciding the issue on its own, the Ninth Circuit certified a question to the California Supreme Court. The answer will determine whether the appeals court upholds the district court’s finding of a non-statutory exemption where plaintiffs did not learn about an alleged fraud until after a buyout (Li v. Arcsoft, Inc., No. 19-cv-05836 (9th Cir. Dec. 3, 2025)).

Buyout. In the mid-2010s, Michael Deng, the founder of ArcSoft, Inc., negotiated a potential buyout by Huatai Securities Co., which valued ArcSoft at $680 million. Negotiations were contingent on Deng’s securing a buyout of ArcSoft’s existing shareholders. To make this happen, Deng withheld information about the ongoing negotiations with Huatai and the considerably improved state of ArcSoft’s finances. Based on incomplete information, shareholders approved a $150 million buyout.

Lawsuit. After ArcSoft’s 2019 IPO on China’s STAR Market, some former shareholders sued for fraud, breach of fiduciary duty, and breach of contract. ArcSoft and Deng argued that the plaintiffs were barred from recovery under Section 1312(a) of the California Corporations Code, which provides that “[n]o shareholder shall have any right at law or in equity to attack the validity of the reorganization or shortform merger,... except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof.”

Another exception? Section 1312(a) contains two express exceptions not germane to the ArcSoft litigation. The question is whether there is an additional, nonstatutory exception when a shareholder did not learn of the basis to attack the validity of the transaction until after it was consummated.

The California Supreme Court last addressed the meaning of Section 1312(a) in 1986, the appeals court observed. In Steinberg v. Amplica, Inc., 729 P.2d 683 (Cal. 1986), the court neither endorsed nor foreclosed the possibility of a nonstatutory exception for a shareholder who does not learn of fraud until after the fact. Since then, the state courts of appeal have noted that the issue of an exception remains an open question, and they have never fully recognized one. (One unpublished decision recognized a partial exception, but this apparently was based on a misreading of an earlier case.)

Furthermore, prior to Steinberg, a decision from the California Courts of Appeal held that there is no non-statutory exception to Section 1312(a) under any circumstances. Steinberg cited this case as good authority and declined to overturn it.

Balancing policy and equity. Other states have diverged on the question after weighing policy considerations. Delaware has recognized an equitable exception under the state’s equivalent of Section 1312(a), but Ohio stuck with appraisal as the exclusive remedy for shareholders “whose goal is simply to receive more money for their stock.”

“That states have taken divergent approaches to precisely this issue based on a reasonable weighing of the costs and benefits makes certification even more necessary,” the Ninth Circuit reasoned. The California Supreme Court is better suited to reconciling the policy objectives of the statute with the background concerns of equity.

Accordingly, the federal court certified the question:

Do the appraisal requirements of California Corporations Code § 1312(a) and the California Supreme Court’s decision in Steinberg v. Amplica, Inc., 729 P.2d 683 (Cal. 1986) (Mosk, J.), preclude a shareholder from seeking buyout-related damages when the facts leading to the shareholder’s cause of action were not known until after the buyout was consummated?

The case is No. 24-2531.

Attorneys: Howard E. King (King, Holmes, Paterno & Soriano, LLP) for Lei Li, Strong Wealth Investment Ltd. and Pacific Smile Ltd. Kathleen R. Hartnett (Cooley LLP) for ArcSoft, Inc. and Michael Deng.

Companies: Strong Wealth Investment Ltd.; Pacific Smile Ltd.; ArcSoft, Inc

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