FACT PATTERN FIVE: Fundamental Corporate Changes Flashcards
Procedure for Fundamental Corporate Changes
To do any fundamental corporate change, we need (1) board action adopting a resolution of fundamental change, (2) the board submits the proposal to the shareholders with written notice, and (3) shareholder approval (in accordance w/ SH voting requirements).
For most of these changes, we also need to deliver a document to the secretary of state.
Dissenting Shareholder Right of Appraisal
Shareholders who did not vote in favor of the fundamental corporate change may have appraisal rights. The right of appraisal is the right of a shareholder to force the corporation to buy their stock for fair value.
Only certain fundamental corporate changes will trigger the right of appraisal:
* Merging or consolidating
* Transfer of substantially all assets not in the ordinary course of business, or
* Transfer of shares in a share exchange
* Converting to another form of business
Market-Out Exception:
No right of appraisal if the company is a publicly held corporation or the company has 2,000 or more shareholders and the shares involved have a value of at least $20 million. This means that the right of appraisal exists in closed corporations
Amendments to the Articles of Incorporation
The corporation can amend its articles with:
- SH approval
- Delivering the amended articles to the secretary of state.
Shareholders generally do not have dissenting rights of appraisal for an amendment to the AoI.
Merger v. Consolidation
A merger involves the blending of one or more corporations into another corporation, and the latter corporation survives while the merging corporations cease to exist following the merger.
A consolidation involves two corporations combining to form a new entity.
Procedure for both:
- BoD Action by both corporations
- Notice to shareholders
- Shareholder approval, generally by both corporations
- Surviving corporation must deliver articles to secretary of state.
There is a right of appraisal for shareholders entitled to vote on the merger/consolidation
When do the shareholders of the surviving corporation not need to approve a merger?
(1) The articles of incorporation of the surviving corporation will not differ 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 identical shares as before, 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 corporation that were outstanding immediately prior to the merger.
Short Form Merger of Subsidiary
No shareholder approval is required for a short form merger.
Short Form Mergers: A parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself without the approval of the shareholders or directors of the subsidiary.
The parent must mail a copy of the plan of merger to each shareholder of the subsidiary.
Successor Liability
A creditor of the corporation can sue the surviving corporation (after consolidation or merger).
Transfer of all or substantially all of the assets of a corporation not in the ordinary course of business.
This is a fundamental corporate change for the transferring corporation only. (rule of thumb: transfer of at least 75 percent of the corporation’s assets.)
Board action by both corporations is required, as well as notice to the selling company’s shareholders.
For a transfer of substantially all assets, we need approval by the transferring company’s shareholders only.
Voluntary Dissolution of a Corporation
Voluntary Dissolution:
(1) Dissolution by Incorporators or Initial Directors (unless shares have not yet been issued or business has not yet been commenced. If shares have been issued, any assets remaining after winding up must be distributed to the shareholders.)
NOTE: The corporation may revoke a voluntary dissolution by using the same procedure that was used to approve the dissolution.
(2) Dissolution by Corporate Act
- Board of director action
- Shareholder approval (votes cast in favor must exceed votes cast against at a meeting where there’s a quorum)
- File notice of intent to dissolve with the secretary of state.
After dissolution, the corporation continues to exist to wind up and liquidate its affairs, but cannot carry on any business. Creditors also need to be notified (so they can make any claims.)
Bringing a Claim Against a Dissolved Corporation
A claim can be asserted against a dissolved corporation, even if the claim does not arise until after dissolution.
If the corporation’s assets have been distributed to the shareholders, a claim can be asserted against each shareholder for his pro rata share of the claim, to the extent of the assets distributed to him.
SoL
If the dissolved corporation notifies claimants in writing of the dissolution and giving them at least 120 days in which to file their claim, they can cut short the time for bringing a claim.
The time for filing unknown claims can be limited to 3 years by publishing notice of the dissolution in a newspaper in the county where the corporation’s known place of business is located.
Involuntary Dissolution
(1) Action by Shareholders.
SH may petition to dissolve a corporation for:
- Director abuse, waste of assets, or misconduct
- Directors are deadlocked in the management of corporate affairs
- Shareholders are deadlocked in voting power and have failed to elect one or more directors for at least two consecutive annual meetings.
- The corporation has abandoned its business and failed to dissolve within a reasonable time
(2) Action by Creditors
Creditors may seek judicial dissolution if the corporation is insolvent, AND:
- The creditor’s claim cannot be satisfied by a judgement, OR
- The corporation has admitted in writing that the creditor’s claim is due and owing.
(3) Action by Attorney General
The attorney general may seek judicial dissolution of a corporation on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority.
Dissolution Overview
Dissolution of a corporation may be voluntary or involuntary.
Voluntary Dissolution
- Dissolution by Incorporators or Initial Directors
- Dissolution by Corporate Act
Involuntary Dissolution
- Action by Shareholders
- Action by Creditors
- Action by Attorney General
