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Chapter 37

Chapter 37 . Fundamental Changes. Fundamental Changes. Mergers Consolidations Share Exchanges Sale or Lease of Assets. Amendment of Articles - Required for Fundamental Changes. 1. Board resolution – Proposed amendment to articles 2. Shareholder approval

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Chapter 37

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  1. Chapter 37 Fundamental Changes

  2. Fundamental Changes • Mergers • Consolidations • Share Exchanges • Sale or Lease of Assets

  3. Amendment of Articles - Required for Fundamental Changes • 1. Board resolution – Proposed amendment to articles • 2. Shareholder approval • A majority of tall outstanding shares entitled to vote • In some instances, the charter or bylaws may require approval by a greater shareholder vote • A class of shareholders may vote as a class • 3. No Board resolution – unanimous written consent of shareholders

  4. Mergers • Two or more corporations COMBINE into One • One corporation ABSORBS/ACQUIRES the other (A + B = A) • A, is the “surviving corporation” and acquires rights and liabilities of B • B, the “merged corporation”, ceases to exist • Certificate of Merger issued • Short-form • Only needs board of directors approval of parent corporation

  5. Consolidation • A new corporation is formed: A + B = C • A and B cease to exist • C acquires all debts and liabilities of A and B. C will issue new stock

  6. Share Exchange • One corporation acquires all the shares of another corporation • After the exchange, the parent corporation owns all the shares of the other corporation • Requires the recommendation of the board of directors of each corporation AND affirmative vote of the majority of shares of each corporation that are entitled to vote. • Certificate of share exchange

  7. Sale or Lease of Assets • Need approval by Board but no shareholder approval is required if sale/lease is in the regular course of business. • A mortgage or pledge of any or all of a corporation’s property requires approval by board (not shareholders) • Shareholder approval by the selling corporation is necessary if sale/lease is NOT in the regular course of business, i.e., significant change of position/inability to carry on business. Rule prevents the board from selling all or most of the assets without shareholder approval • Generally, a corporation purchasing the entire assets of another corporation does not by reason of the purchase become liable for the other’s debts unless: • It agreed to assume them • The transaction is actually a merger • The purchaser is a mere continuation of the seller • The sale is for the fraudulent purpose of avoiding the liabilities of the seller • Product line exception

  8. Rights of Dissenting Shareholders • Dissenting shareholder must deliver his/her written intent to demand payment of his/her shares BEFORE vote, and not vote in favor of the proposal • Appraisal Remedy – Compel the corporation to buy their shares for cash at the appraised “fair value” • Exception: Existing market • Shareholder loses right to later attack the validity of the corporate action, except where there has been fraud or other unlawful action • Mergers: Dissenting shareholders of each corporation have an appraisal remedy. BUT, in a short-form merger, only dissenting shareholders of the subsidiary have appraisal rights • Sale of Assets Other then in Regular course of Business – Dissenting shareholders of the selling corporation are given an appraisal remedy

  9. Tender Offers • Bypass Board approval • Extend tender offer directly to shareholders • Tender Offeror & Target Corporation • Tender offeror’s board of directors must approve the offer - shareholders do not have to approve • Williams Act of 1968 - Regulates tender offers, establishes disclosure provisions, antifraud provisions

  10. Defensive Strategies used by incumbent management in defending hostile takeovers • Persuasion of shareholders • Lawsuits • Selling a crown jewel • Scorched Earth • Adopting a poison pill • White knight merger • Pac man (or reverse) tender offer • Issuing additional shares • ESOP • Flip-over and flip-in rights plans

  11. Leveraged Buyout (LBO) • Involves a large amount of borrowed money • Bridge Loans • Junk Bonds

  12. Dissolution - Voluntary • Unanimous written consent of the shareholders • By Board resolution and majority of shareholders entitled to vote • No judicial supervision necessary • Notice must be given to all known creditors; also constructive notice (publication) • Dissolution effective when filed with the state • Liquidation: pay creditors, shareholders, etc. • Preservation of claims after dissolution (FL 3 years) • Claimant who did not receive notice • Corporation failed to act on claimant’s claim in a timely fashion • Action involving the dissolution • By operation of law, the directors at the time of dissolution become trustees for any property owned or acquired by the dissolved corporation and continue for 3 years

  13. Involuntary Dissolution • Administrative dissolution - By Sec of State if: • Corporation obtained its articles by fraud • Failure to pay taxes • No annual report filed • No registered agent • Durational period expires • Ultra vires act • Judicial intervention by State, creditors or shareholders when: • Corp is threatened with irreparable injury and there is a deadlock of the directors • Illegal actions by directors • Corporate assets wasted • Director’s actions contrary to best interests of the corporation • Shareholders deadlocked and unable to elect directors for two consecutive annual meetings • Corporation unable to pay its debts

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