Fundamental corporate changes Flashcards
Characteristics of fundamental corporate change
a. These are extraordinary, so the board generally cannot do them alone. What are they?
i. Amend artiles
ii. Merge or consolidate with another cco
iii. Transfer substantially all assets or having stock acquiried
iv. Convert to another form of business
v. Dissolution
b. Generally to do any of these
i. Board action adopting a resolution of fundamental change
ii. Board submits proposal to shareholders with written notice
iii. shareholder approval—
1. need majority of shares entitled to vote
2. this is changing, more and more states only require a majority of the shares that ACTUALLY vote.
3. To be safe, apply the traditional rule
iv. In most of these changes, we need to deliver a document to the secretary of state
Dissenting SH right of appraisal for fundamental changes
i. Right to force the corporation to buy your stock for fair value.
ii. Only these changes trigger right of appraisal
1. Merging or consolidating
2. Transferring substantially all assets , or
3. Stock being acquired in a share exchange
iii. Even if doing one of these, no appraisal if company stock is listend on a national exchange or if the company has 2k or more shareholders. i.e. right only for close corporations
iv. To perfect your right of appraisal (remember: before, during and after the vote)
1. Before the shareholder vote, file with the corporation written notice of objection and intent to demand payment
2. At the shareholder vote, abstain or vote against the proposed change
3. AND
4. After the vote, within time set by corporation, make written demand to be bought out and deposit stock with corporation
v. IF shareholder and corporation cannot agree on fair value of shares, the corporation sues and court may appoint an appraiser.
1. Right of appraisal is shareholder EXCLUSIVE remedy if she doesn’t like fundamental change, unless there is fraud
Amendment of the articles
a. board of directors action and notice to shareholders
b. shareholder approval
i. must have majority of shares entitled to vote
ii. again, this is changing, in many states all you need is a majority of those that actually voted.
c. If approved, deliver amended articles to secretary of state.
Merger
III. Mergers ( one corporation merges into another) or consolidations (two corps form new corporation)
a. board of directors action (of BOTH corporations) AND notice to shareholders
b. shareholder approval (usually both corps). Same as with amending articles. Same vote requirement with amending articles
c. No shareholder approval required if a 90% or more owned subsidiary is merged into a parent.
i. AKA Short form merger.
d. If approved, surving corporation delivers articles of merger or consolidation to secretary of state
e. Remember the right of appraisal. Generally, for shareholder entitled to vote on the merger or consolidation and also for shareholders of sub in short-form
f. Effect: surviving corporation succeeds to all rights and liabilities of the constituents.
i. Makes sense, because the constituent corporation is gone. So creidotr of gone corporation can sue.
ii. This is called successor liability.
Transfer of assets and share exchanges
IV. Transfer of all or substantially all of the assets not in the ordinary cours of business OR a share exchange (where one company acquires all stock of another)
a. “Substantially all of the assets”→ varies from state-to state. Rule of thumb is that it requires transfer of at least 75% of the assets
b. these are only fundamental corporation change for the SELLING company not the buyer.
c. Boar action (both corporations) and notice to selling company’s shareholders
d. Approval by the selling corporation’s shareholders
i. Number of shares of selling corporation→ same as with amendment of articles
ii. Number of shares of buyer that must approve→ NONE
e. Dissenting shareholders of selling corporation have right of appraisal
i. Not for buyer
f. Deliver to Secretary of state articles of exchange. Usually no filing in transfer of assets.
g. No successorliability in sale of assets
i. Because the selling company still exists, so creditors can sue IT.
ii. Exception: if the buyer is a mere continuation of the seller—has the same management, shareholders etc.
iii. Also there will be successor liability if a court concludes that the deal was really a disguised or de facto merger
Conversion
V. Conversion—Business converts to another form (for ex. corporation converts to LLC_. board of directors approval, notice to shareholders, shareholder approval, deliver document to Secretary of state, dissenting shareholder right of appraisal
Dissolution
a. Voluntary. Board action AND shareholder approval—like any other change
i. File notice of intent to dissolve with Secretary of state. Corporation stays in existence to wind up. Notify creditors so they can make claims.
b. Involuntary (by court order). - SH or creditor an petition for involuntary dissolution because of:
1. Director abuse, waste of assets, misconduct
2. Director deadlock that harms the corporation
3. OR
4. shareholders fail at consecutive annual meetings to fill a board vacancy
5. as an alternative to ordering involuntary dissolution, court MIGHT order buyout of the objecting shareholder.
a. More likely in a close corporation
ii. A creditor can petition because the corporation is insolvent and
1. He has an unsatisfied judgment
2. OR
3. The corporation admits the debt in writing.
c. Dissolution is not the end of the corporation. It is the beginning of a process that will end the corporation existence. The task is now to wind-up (liquidate)
i. Liquidation =
1. Gathering all assets
2. Converting to cash
3. Paying creditors
4. Distributing remainder to shareholders, pro rata by share unless there is a liquidation preference
a. Liquidation preference means “pay first” → works like a dividend preference
i. For ex, after paying creditors there is 10k left for shareholders. If there is a class of 1k shares with $2 liquidation preference, the first $2k goes to them, remaining $8k going to common shares.
b. Liquidation preference is relevant to insolvency
