Pg 54 Flashcards
What are considered to be fundamental changes to a corporation?
- the sale of all or substantially all assets – merger or consolidation - dissolution – compulsory share exchanges – amending the articles of incorporation
Basically anything that fundamentally alters the ability of the corporation to continue to exist in its current form
What is necessary to make a fundamental change to a corporation?
It must be initiated by the board and there must be shareholder approval
What is involved in a corporation selling substantially all or all of its assets?
There must be the majority of the board approving this and the majority of shareholders approving it
What is a de facto merger?
When a corporation sells all or substantially all of its assets and distributes the shares of the purchasing company that it received to its shareholders and then dissolves. The buying corporation acquires all the liabilities of the selling corporation because this is essentially a merger.
What is an example of a de facto merger?
If you want to buy a lumber company to provide wood for your furniture corporation, but you don’t have cash, so instead you buy the company with shares of your furniture corporation’s own stock. Now the lumber company is the main minority shareholder in the furniture company. The lumber company can either continue as the owner of shares in the furniture company, or exchange the shares for its own shares and wind up its business, leaving its former shareholders as shareholders of the furniture corporation
What is essentially happening in this situation? If you propose a sale of substantially all of the assets of your corporation, and in return the buying corporation will give shares of its stock to your corporation. Your corporation will then pay its creditors, distribute the buying corporation’s stock to its shareholders, and dissolve. The buying corporation then acquires the liabilities of your corporation
This is a de facto merger
If a corporation is trying to sell all or substantially all of its assets and a shareholder dissents to this by not voting for the sale, what rights does the shareholder have?
He can be paid for his shares in cash by the corporation re-purchasing his shares for fair value
If a dissenting shareholder doesn’t agree to a corporation selling all or substantially all of its assets and the corporation cannot agree on the fair value that the corporation will pay for the shares of the shareholder, what happens?
The corporation must have the court determine the fair value. If the corporation doesn’t sue within 60 days of getting a payment demand, it loses the dispute and the shareholder’s valuation is accepted.
What is the definition of “substantially all“ if a corporation attempts to sell all or substantially all of its assets?
80% or more. The idea is this that this is what otherwise wouldn’t be in the regular and usual course of business
If a wholesale business has inventory as its only asset that it regularly sells out of in one transaction before buying more, does that count as something that would need shareholder permission for because they’re selling all or substantially all of their assets?
No because that is in the usual and regular way that they do business
When a corporation acquires the assets of another corporation, do they also acquire the general debts and liabilities of the corporation that is selling its assets?
No, unless:
- the purchasing corporation implicitly or expressly agrees to assume liability
- the transaction is really a consolidation or merger [de facto merger]
- the purchasing corporation is just a continuation of the selling corporation
- the transaction is entered into fraudulently to escape liability for these debts
If a company sells fake eyebrows and another company acquires 95% of its assets, then the new company continues to sell the same products that the first company sold before the sale under the same label and uses the same manufacturer and employees, but replaces the CFO, does the second company acquire the debts and liabilities of the first company?
Yes, because that is effectively a continuation of the selling corporation. There doesn’t have to be 100% overlap, it just has to be significant enough to be an effective continuation of the former company.
If a purchasing corporation is really just a continuation of the original corporation that was selling all or substantially all of its assets, what is the focus to determine if they are taking on liabilities too?
The sameness. If the purchasing corporation carries on the business of the selling corporation with shared identities, having the same shareholders, management, name, locations, business, employees, etc. then it’s the same. It doesn’t have to be 100% identical to the selling corporation
What is a merger and consolidation?
This involves the transfer of assets in the business of one corporation to another corporation. In exchange for the assets in the business of the first corporation, the second corporation issues securities or pays cash to the shareholders of the first one.
Are mergers and consolidations treated differently?
No, they have all the same rules
