Fundamental Corporate Changes

Question 1

Characteristics of a fundamental corporate change

Answer 1

These are so fundamental that most of them require both that the board approves and that the shareholders approve. In addition, in most, the corporation must notify the Department of State by delivering a document which the Department files.

Question 2

What is the dissenting shareholders’ right of appraisal?

Answer 2

The right to force the corporation to buy their stock at fair value

Question 3

What actions by the corp trigger the s/h right of appraisal? [5]

Answer 3

1- amendments to the certificate that alter/abolish a preference, change redemption rights, alter/abolish a preemptive right, or limit voting rights

2- consolidation- your corp merges w/ another corp & neither corp survives (a+b=c)

3*- your corp merges into another corp (your corp doesn’t survive)

4*- your corp transfers substantially all of its assets; or

5- your corps shares are acquired in a share exchange

Question 4

What types of corps have rights of appraisal?

Answer 4

CLOSE CORPS ONLY!! Publicly traded stock never gets a right to appraisal!

If the corp is listed on a national securities exchange or NASDAQ you don’t need a right of appraisal b/c you can just sell your stock on the market.

Question 5

What must the s/h do to perfect the right of appraisal?

Answer 5

1- BEFORE the s/h vote, file a written objection & your intent to demand payment; AND
2- abstain from voting OR vote against the change; AND
3- after the vote, make a written demand to be bought out

Question 6

How is “fair value” for appraisal determined?

Answer 6

If s/h and the corp cannot agree on fair value, the corp sues and the court determines the value.

Question 7

Amendment to the Certificate:

Who makes minor changes?

Answer 7

Minor changes such as office location, registered agent, etc can be made by BOARD ALONE

Question 8

Amendment to the Certificate:

Who makes major changes?

Answer 8

GENERALLY- must be approved by (1) director action and (2) a majority of the shares ENTITLED TO VOTE. [note, this is diff then regular s/h voting where you only need a majority of the shares actually voting]

Question 9

Amendment to the Cert:

Amendment changing or striking a supermajority quorum requirement for s/h voting

Answer 9

Director approval + 2/3 of shares entitled to vote

Question 10

What is the difference btw a merger and a consolidation?

Answer 10

Merger = A corp merges into B corp

Consolidation = A corp and B corp form C corp

Question 11

Steps to a merger or consolidation:

Answer 11

1- Each corps BoD adopts a place of merger or consolidation; and
2- (generally) each corps s/h must approve by a majority of shares entitled to vote;
3- deliver certificate or merger or consolidate to Dept of State for filing

Question 12

Short-Form Merger

Answer 12

When a subsidiary is merged into a parent corporation THAT owns 90% or more of each class of the subsidiary’s stock

• NO SHAREHOLDER APPROVAL REQUIRED FOR THIS MERGER
• Dissenting shareholders of the subsid have the right of appraisal even though they didn’t vote

Question 13

What is the effect of a merger or consolidation?

Answer 13

Successor Liability– surviving corp succeeds to all rights and liabilities of the disappearing company

Question 14

NOTE: Transfer (not mortgage) of all or substantially all corp assets not in the ordinary corse of business AND share exchanges ARE FUNDAMENTAL CORP CHANGES FOR THE SELLING CORPORATION ONLY.

Answer 14

REMEMBER: SELLING CORP ONLY, SO ONLY PPL FROM THAT CORP MAY HAVE APPRAISAL RIGHTS

Question 15

What is a share exchange?

Answer 15

Once corp acquires all the outstanding shares of one or more classes of another corp.

Question 16

Steps to a sale of all or substantially all corp assets OR share exchange:

Answer 16

1- BoD authorizes the deal
2- approval by a majority of the SELLERs s/h entitled to vote [Note: buyer’s s/h don’t vote b/c their corp isn’t undergoing a fundamental change]
3- Share Exchange– deliver plan to Dept of State;
3– Sale– no filing required

Question 17

Effect of purchase of substantially all assets?

Answer 17

Generally, the company acquiring assets will not be liable for the torts of the company whose assets it acquired unless (1) the deal provides otherwise, or (2) the purchasing company is mere continuation of the seller, or (3) the deal was entered fraudulently to escape such obligations.

NOTE: this is diff from the merger; here there is generally no successor liability b/c the company selling assets still exists

Question 18

VOLUNTARY DISSOLUTION: Who votes?

Answer 18

NO Board vote necessary!!

Majority of shares entitled to vote must approve!

then deliver the cert of dissolution to the Dept of State for its filing

Question 19

INVOLUNTARY DISSOLUTION– what is it?

Answer 19

Someone is asking for a court order of dissolution

Question 20

How do publicly traded corps petition for judicial dissolution?

Answer 20

1- 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

2- 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

3- Any shareholder entitled to vote may petition if shareholders unable to elect directors for two annual meetings

Question 21

Additional method for a closed corp to petition for judicial dissolution?

Answer 21

20% or more of voting shares in a closed corp may petition on either of these grounds:

1- managements illegal, oppressive, or fraudulent acts toward the complaining shareholders; OR

2- managements wasting, diverting, or looting of assets

NOTE: management here is either BoD OR managing s/h

Question 22

Does court have to grant dissolution to petitioning 20% or more s/h in a closed corp?

Answer 22

• 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 buy out. Court will consider whether liquidation is necessary to protect the petitioners and is the only way for them to get a fair return on their investment
• To prevent dissolution, the corp or non-complaining s/h may w/in 90 days peititon to buy the petitioners stock at fair value on terms approved by the court

Question 23

Does dissolution end the corporation’s existence?

Answer 23

NO- the corporation stays in existence to “wind up”

Question 24

Steps in winding up (aka liquidating):

Answer 24

1- gather all assets
2- convert to cash
3- pay creditors (they had been given notice earlier), and
4- distribute remainder to shareholders, pro-rata by share unless there is a dissolution preference

Question 25

Dissolution Preference

Answer 25

Works like a dividend preference; means pay this s/h first