FACT PATTERN FIVE— FUNDAMENTAL CORPORATE CHANGES 11 FUNDAMENTAL CORPORATE CHANGES Flashcards
CHARACTERISTICS OF FUNDAMENTAL
CORPORATE CHANGE
11.1.1 Types of Fundamental Corporate Changes
- Fundamental corporate changes are extraordinary, so board generally cannot do them alone.
- They include the following types of changes:
(1) Amending the articles
(2) Merging/consolidating into another company
(3) Transferring substantially all assets (or having stock acquired in a “share exchange”)
(4) Converting to another form of business
(5) Dissolving
Procedure for Fundamental Corporate
Changes
- Generally, to do any fundamental corporate change, we need
(1) board action adopting a resolution of fundamental change;
(2) board submits proposal to shareholders w/ written notice; and
(3) shareholder approval.
-For most of these changes, we also need to deliver a document to the secretary of state.
Shareholder Approval
- Shareholder vote that’s required to approve a fundamental corporate change is a majority of the shares entitled to vote.
- But this is changing; an increasing number of states
reqiure only a majority of the shares that actually vote on the proposed fundamental change. - Generally, though, we’ll apply the traditional rule.
Dissenting Shareholder Right of Appraisal
- If corp approves certain fundamental corporate
changes, shareholders who did not vote in favor of change may have appraisal rights. - The dissenting shareholder right of appraisal is the right of a shareholder to force corp to buy their stock for fair value.
Applies Only to Certain Fundamental Changes
- Only certain fundamental corporate changes will trigger right of appraisal:
(1) Merging/consolidating
(2) Transferring substantially all assets
(3) Stock being acquired in a share exchange
(4) Converting to another form of business
Exists in Close Corporations
- Note that even if company is doing one of these
changes, there is no appraisal right if company’s stock
is listed on a national exchange (it’s a publicly traded
corp) or if company has 2,000/more shareholders
(not shares, shareholders) & shares involved have a value of at least $20 million (exclusive of the shares
held by senior executives, directors, & shareholders
owning more than 10% of the shares). - This is known as the “market-out exception.”
- What it means is that the right of appraisal exists in close corporations.
- This makes sense b/c if you don’t like a fundamental change in a public corp, you can just sell your stock on the public market.
- But in a close corporation, there is no market to
buy the stock, so you can force the company to buy your stock.
Perfecting Right of Appraisal
For a shareholder to perfect a right of appraisal:
(1) If a proposed corporate action will create dissenters’ rights, notice of shareholders’ meeting at which a vote on the action will be taken must state that shareholders will be entitled to exercise their dissenting rights;
(2) Before the shareholders vote, the shareholder must file w/ corp a written notice of objection & intent to demand payment;
(3) At the shareholder vote, shareholder must abstain /vote against proposed change (they cannot vote in favor of proposed action);
(4) If action is approved, corp must notify, w/in 10 days after approval, all shareholders who filed an intent to demand payment.
- Notice must include time & place to submit her shares & other terms of repurchase;
(5) W/in the time set by corp, shareholder must make written demand to be bought out & deposit her stock w/ corp; and
(6) Corp must pay dissenters the amount corp estimates as fair value of shares, plus accrued interest.
- If shareholder is dissatisfied w/ corp’s determination
of value, shareholder has 30 days in which to send the corp her own estimate of value & demand
payment of that amount (or difference between her
estimate & amount sent by the corp).
- If the shareholder & corp cannot agree on the fair
value of the shares, corp must file an action in ct w/in 60 days of receiving shareholder’s demand,
requesting ct to determine fair value of shares, & ct may appoint an appraiser.
- If corp does not so file, corp must pay what shareholder demanded.
Exclusive Remedy
- Absent fraud, the right of appraisal is the shareholder’s exclusive remedy if they do not like a fundamental change.
AMENDMENTS TO ARTICLES OF
INCORPORATION
- Corporation can amend its articles by following the procedure we discussed above.
- Certain “housekeeping” amendments (ex. deleting names of initial directors named in articles/changing number of authorized shares after a stock split) can be made w/o shareholder approval, but most require approval by shareholders.
- If approved, amended articles must be delivered to secretary of state.
- Shareholders generally do not have dissenting rights of appraisal for amendments of the articles.
MERGERS AND CONSOLIDATIONS
- Merger involves blending of one/more corps into another corp, & the latter corp survives while merging corps cease to exist following merger (ex. B, Inc. merges into A Corp.).
- Note that a domestic corp can merge w/ a foreign corp into a new domestic corp, but only if merger is permitted in foreign corp’s state of incorporation.
- A consolidation involves 2 corps combining to form a new entity (Ex. A Corp. & B, Inc. form C Corp.).
- For both mergers & consolidations, board of
director action (by both corps) is required, as well as
notice to shareholders & shareholder approval, generally by both corps (the required vote is the same as w/ amending articles). - If approved, the surviving corp must deliver articles of merger or consolidation to secretary of state.
- There is a right of appraisal, generally, for shareholders entitled to vote on the merger/ consolidation & also for shareholders of the subsidiary in a short form merger (discussed below).
No Significant Change to Surviving Corporation
- Approval of a plan of merger by shareholders of surviving corp is not required if all the following
conditions exist:
(1) AOI of surviving corp will not differ from articles before merger;
(2) each shareholder of survivor whose shares were outstanding immediately prior to effective date of merger will hold same number of shares, w/ identical preferences, limits, & rights; and
(3) the voting power of the shares issued as a result of 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.
Short Form Merger of Subsidiary
- No shareholder approval is required for a short form merger.
- With short form mergers, a parent corp owning at least 90% of outstanding shares of each class of a subsidiary corp may merge subsidiary into itself w/o approval of shareholders/directors of subsidiary.
- Parent must mail a copy of the plan of merger
to each shareholder of the subsidiary.
Effect of Merger or Consolidation
- Surviving corp succeeds to all rights & liabilities of the constituents.
- This makes sense b/c the constituent corp disappeared.
- So a creditor of that corp can sue survivor.
- This is known as successor liability.
TRANSFER OF ALL OR SUBSTANTIALLY
ALL ASSETS AND SHARE EXCHANGE
- Another fundamental corporate change involves the transfer of all/substantially all of the assets of a corp not in the ordinary course of business.
- We can group this together w/ a similar fundamental corporate change, the share exchange, which is when one company acquires all of the stock of another.
- We treat these alike b/c functionally, they’re the same idea: one company is gobbling up another
(either all of its assets, or all of its stock). - What constitutes “substantially all of the assets” varies from state to state.
- A good rule of thumb is that it requires the transfer of at least 75% of the corporation’s assets.
Fundamental Corporate Change for Selling
Corporation Only
- Both the transfer of all/substantially all assets & the
share exchange are fundamental corporate changes for the selling corp only—not for buyer. - So corp disposing of the property must follow fundamental change procedure.
