Corporations - Fundamental Corporate Changes Flashcards
Procedure for Fundamental Corporate Changes
To do any fundamental corp change you need:
1) board action adopting a resolution;
2) board submits the proposal to the shareholders with written notice; AND
3) shareholder approval
For most changes, also need to deliver a document to the secretary of state
The Shareholder Approval Vote = follows ordinary voting rule: at a meeting where a quorum is present, votes cast in favor exceed votes cast against.
Dissenting Shareholder Right of Appraisal
If a corp approves certain fundamental changes, the shareholders who did not vote in favor may have appraisal rights. Right of appraisal = the dissenting shareholder can force the corp to buy their stock for FMV.
This only applies to certain fundamental corp changes:
1) Merging or consolidating
2) Transfer of substantially all assets not in the ordinary course of business, or
3) Transfer of shares in a share exchange
4) Converting to another form of business
This right of appraisal MOSTLY ONLY exists in close corps. NO APPRAISAL RIGHT if the company’s stock is listed on a national exchange or if company has 2000 or more shareholders and the shares have a value of at least 20m. This is the “market-out exception”. It means that the right of appraisal exists in close corps.
Shareholders must “perfect” the right of appraisal (basically complain or vote against the action, demand to be bought out, etc) (pg 62)
Absent fraud, this is a shareholder’s sole exclusive remedy if they don’t like a fundamental change.
Amendments to Articles of Incorporation
Most amendments to the articles require shareholder approval.
Shareholders generally DO NOT have dissenting rights of appraisal for an amendment.
Mergers and Consolidations
Merger = blending of 1 or more corporations into another corporation and the latter corporation survives while the merging corporations cease to exist following the merger.
Consolidation = two corporations combining to form a new entity.
Requires:
1) board of director action by both corps
2) Notice to shareholders and shareholder approval by both corps generally (votes cast in favor must exceed votes cast against at a meeting where there is a quorum)
If approved, surviving corp must deliver articles of merger or consolidation to secretary of state.
Approval of merger by shareholders of the surviving corp NOT required if:
1) articles of incorporation of surviving corp won’t be different from the articles before the merger
2) each shareholder of the survivor whose shares were outstanding immediately prior to the effective date of the merger will hold the same number of shares, with identical preferences, limitations, and rights; and
3) the voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corp that were outstanding immediately prior to the merger.
No shareholder approval needed for SHORT FORM MERGER OF SUBSIDIARY
Effect of Merger/Consolidation = the surviving corp succeeds to all rights and liabilities of both. A creditor of the previous ones can sue the survivor under successor liability theory.
Transfer of All or Substantially All Assets Not in the Ordinary Course of Business; and Share Exchange
Basic idea for both: one company is eating another whole.
Transferring all/substantially all the assets to another company means getting eaten.
Share exchange when one company acquires all of the stock of another means getting eaten.
“Substantially all” assets = 75% in general
The one getting eaten is undergoing a fundamental corporate change so it must follow the fundamental change procedure: board action by both corps is required as well as notice to the selling company’s shareholders.
–» For transfer of all assets = need approval by transferring company’s shareholders only
–» For Share Exchange = only the shareholders of the corp whose shares will be acquired need approve. Articles of exchange must be delivered to secretary of state.
Successor Liability does NOT exist for a sale of substantially all assets (exception if buyer is a “mere continuation” of the seller or if disguised as a de facto merger)
Voluntary Dissolution
Dissolution by Incorporators or Initial Directors = if shares have not yet been issued or business has not yet been commenced, a majority of incorporators or initial directors may dissolve by delivering articles of dissolution to state. All corp debts must be paid and if shares have been issued, any assets remaining must be distributed.
Dissolution by Corporate Act = may dissolve by act approved under fundamental change procedure. Need board of director action, shareholder approval, and must file notice of intent to dissolve with secretary of state.
Effect of Dissolution = corp that has been dissolved continues its corp existence to wind up but is not allowed to carry on any business except as appropriate to wind up and liquidate its affairs. Need to notify creditors so they can make claims. A claim can be asserted against a dissolved corp to the extent of the corp’s undistributed assets.
Revocation = corp may revoke a voluntary dissolution by using same procedure to approve dissolution
Involuntary Dissolution
Also known as judicial dissolution because it happens by court order.
Action by Shareholders to force dissolution can happen on any of these grounds:
1) director abuse, waste of assets, or misconduct
2) directors are deadlocked and irreparable injury to corp is threatened
3) shareholders are deadlocked and have failed to elect 1 or more directors
Election to purchase in lieu of dissolution = court might order a buy out of the objecting shareholder, especially in close corps
Action by Creditors to force dissolution:
if corp is insolvent and 1) creditors’ claim has been reduced to judgment but couldn’t be executed OR 2) corp has admitted in writing the creditor’s claim is due and owing
Action by Atty General to force dissolution: if corp fraudulently obtained its articles or is abusing its authority
Adminstrative Dissolution: for failure to pay fees, penalties, maintain registered agent, etc. If corp doesn’t correct within 60 days, that’s GG. But could get corp reinstated within 2 years after dissolution.
Winding Up the Corp
This means liquidating the corp.
Steps for Winding Up:
1) Give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its PPB
2) Gather all assets
3) Convert assets to cash
4) Pay creditors
5) Distribute any remaining sums to shareholders, pro rata by share, unless there is a liquidation preference (to get paid first)
Conversion
This is when one business entity changes from like from Corp to LLC.
Procedure is similar because this is a fundamental corp change: need board approval, notice to shareholders, and shareholder approval. Need to deliver doc to the secretary of state. For conversion, shareholders also have a dissenting right of appraisal
Tender Offers
Tender Offer = widespread public offering by a “bidder” to purchase a substantial % of shares from shareholders of a “target” corp
Regulation of Bidder:
If bidder makes tender offer, and the offer will result in bidder obtaining more than 5% of class of securities of the target, bidder must file a schedule 14D containing extensive disclosure regarding:
- Bidder’s identity, source of funds, past dealings with the target, and plans concerning the target
- Bidder’s financial statements if the bidder is not an individual
- Any arrangements made with persons in important positions at the target
Regulation of the Offer
- Tender offer must be held open for at least 20 days and must be open to all members of the class of securities sought
- Shareholders must be permitted to withdraw tendered shares while offer remains open
- If offer is oversubscribed, bidder must purchase on a pro rata basis during first 10 days of offer AND
- If offer price is increased, higher price must be paid to all tendering shareholders
Regulation of Target
- Management of target must either 1) give its shareholders a recommendation concerning the offer, with a statement of reasons, or 2) explain why it can’t make a recommendation
General Anti-Fraud Provision: shareholders can sue for false or misleading statements or omissions in connection with an offer
