Corporations - Fundamental Corporate Changes Flashcards
What are “Fundamental Corporate Changes”
(1) certain amendments to the CERTIFICATE
(2) Consolidation
(3) Merger with another corp
(4) transfer of substantially all of its assets
(5) corporation’s shares are acquired in a share exchange
Characteristics of Fundamental Corporate Change
These are so fundamental that most of them require BOTH that
(i) the BOARD APPROVES, and
(ii) that the SHAREHOLDERS APPROVE.
In addition, in most, the corporation must notify the Department of State by delivering a document which the Department must file
What is the dissenting shareholders’ RIGHT OF APPRAISAL?
The RIGHT OF APPRAISAL is the right to force the corporation to buy your stock at Fair Value (ie the right to be bought out)
What actions by the corporation trigger the shareholder’s right of appraisal?
basically, fundamental corporate changes
(1) certain amendments to the CERTIFICATE
(2) Consolidation
(3) Merger with another corp
(4) transfer of substantially all of its assets
(5) corporation’s shares are acquired in a share exchange
BUT, even if the corporation is doing one of these things, there is no right of appraisal if the corporation is listed on a national securities exchange or NASDAQ. - this is because if the company is PUBLICLY TRADED you can just sell your stock on the market
IE APPRAISAL RIGHTS only belong to shareholders of CLOSE CORPORATIONS
What actions are taken by shareholders to perfect the right of appraisal?
(a) before the shareholder vote,FILE A WRITTEN OBJECTION and your intent to demand payment
(b) ABSTAIN or VOTE AGAINST the change; AND
(c) After the vote, make a WRITTEN DEMAND to be bought out
How much will the shares be bought back for if a shareholder exercises his right of Appraisal?
IF the shareholder and the corporation cannot agree on fair value, the corporation sues and the court determines the value
NY has NO MINORITY DISCOUNT -In setting the value of the stock, the court CANNOT discount the value to reflect that minority shares may be worth less than controlling shares, because they carry no control over corporate affairs– just get the fair value of the stock
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
(a) Minor changes, such as those relating to office location, registered agent, etc. can be made by board alone
(b) other amendments must be approved by
(1) DIRECTOR ACTION and
(2) a MAJORITY of the shares ENTITLED TO VOTE (note: not just a majority of shares that DO vote at a meeting, different than normal SH action)
e. g. the directors approve an amendment and recommend it to shareholders. IF there are 4,000 shares entitled to vote, how many must vote for the amendment? – at least 2,001 (need a majority
e. g.2 same facts but suppose only 2,400 shares attend the meeting to vote for the amendment and only 2,200 shares actually vote. How many must vote in favor of the amendment for it to pass? - at least 2,001 (NEED a majority of shares ENTITLED TO VOTE, not just a majority present
Weird Rule
(c) If the amendment will change or strike a supermajority quorum or voting requirement for shareholder (not director) voting, you need director approval plus a 2/3RDS* of shares entitled to vote
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IF the amendment is approved, deliver certificate of amendment to department of state for its filing
Are there dissenting shareholders rights of appraisal for changes in the certificate of incorporation?
YES, if the amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right or limits voting rights
MERGERS OR CONSOLIDATION
Merger = A corp mergers into B corp Consolidation = A corp and B, inc. form C Corp.
REQUIREMENTS:
(i) Each company’s board of directors adopts a plan of merger (or consolidation) AND
(ii) SHAREHOLDER APPROVAL - each corporation
(iii) Deliver CERTIFICATE OF MERGER (or consolidation) to Dept of State for filing
e.g. A corp has 6,000 shares entitled to vote. so at least 3,001 (a majority of shares entitled to vote) must vote in favor of a proposed merger of A corp into B, inc.
APPRAISAL RIGHTS: YES for shareholders of the company that disappeared. Generally, this (right of appraisal) is NOT for the shareholders of the SURVIVOR
Short Form Merger
“Short Form Merger” - NO SHAREHOLDER APPROVAL required, though, if parent corporation owns 90% or more of each class of stock of a subsidiary that is merged into a parent corporation
APPRAISAL RIGHTS: dissenting shareholders of a subsidiary in a SHORT FORM merger HAVE the right of appraisal, even though they did note vote
What is the effect of merger or consolidation?
The surviving company succeeds in all rights and liabilities of the disappearing company
This is called SUCCESSOR LIABILITY
NOTE: Succesor liability makes sense, because some business has disappeared - ceased to exist - so creditors of that business need to be able to sue the surviving company
TRANSFER or all or Substantially All of the Assets NOT in the Ordinary Course of Business or Share Exchange
These are fundamental corporate changes for the SELLING corporation ONLY. Not for the buying corporation
e.g. S Corp wants to sell all of its assets to B, INc. or B, Inc. wants to acquire all the assets of S Corp.
Requirements:
(1) Each corporation’s board of directors authorizes the deal; AND
(2) Approval by selling corporation’s shareholders
(i) Number of shares of S Corp. that must approve the sale is a MAJORITY OF SHARES ENTITLED TO VOTE
(ii) Number of shares of B, INc. that must approve the sale? - NONE, they do not vote, bc it is not a fundamental change for the buyer
APPRAISAL RIGHTS: YES, for the shareholders of the selling company only, not a fundamental change for the buyer so not for them
Share Exchange
SHARE EXCHANGE - A corporation may enter into a binding share exchange with another corporation in which th acquiring corporation acquires all the outstanding shares of one or more classes of stock of the subject corporation
Requirements: (same as transfer of substantially all assets except #3)
(1) Each corporation’s board of directors authorizes the deal; AND
(2) Approval by selling corporation’s shareholders
(3) must deliver plan of exchange to the Department of State for filing.
Note: In the transfer of assets no filing is required
APPRAISAL RIGHTS: YES, shareholder entitled to vote who does not assent to a share exchange IS entitled to payment of the fair value of his shares IF his shares are to be acquired in the exchange
DISSOLUTION
(i) if Dissolution is VOLUNTARY - no board vote necessary, just need a majority of shares entitled to vote (don’t need board)
(ii) INVOLUNTARY Dissolution (judicial - someone is asking for a court order of dissolution) - 4 ways
- -(a) by Board resolution or resolution of majority of shares entitled to vote, stating that corporation has insufficient assets to discharge liabilities or that dissolution would be beneficial to shareholders
- -(b) One-half or more of shares entitled to vote may petition if directors too divided to manage or shareholders too divided to elect directors or magnitude of internal dissention makes dissolution beneficial to shareholders
- -(c) ANY shareholders entitled to vote may petition if shareholders unable to elect directors for two annual meetings
- -(d) 20% or more of voting shares in corporation whose shares are NOT traded on a securities market (ie closed corp) may petition on either of these grounds:
- —– (I) Management’s Illegal, Oppressive, or fraudulent acts toward the complaining shareholders, OR
- —– (II) Management is WASTING, Diverting or looting assets
Who is “management” here? bc this is a closed corp - it could be the board OR managing shareholders (remember: closed corp can have bd. but doesn’t have to)
Can the court DENY dissolution?
YES, the court may DENY DISSOLUTION if there is some other way the complaining shareholder can obtain a fair return on his investment - e.g. by ordering a BUY OUT.
Court will consider whether liquidation is necessary to protect petitioners and is the only way for them to get a fair return on their investment
How may corporation or non-complaining shareholders try to avoid dissolution here?
– Within 90 days of the petition, buy the petitioner’s stock at FAIR VALUE on terms approved by the court
