5: FUNDAMENTAL CORPORATE CHANGES Flashcards
I. CHARACTERISTICS OF FUNDAMENTAL CORPORATE CHANGE
A. These are extraordinary occurrences, like selling off all assets or merging, so the board of directors cannot do these alone.
First, the board takes an action adopting a resolution of a fundamental corporate change.
Second, the board must submit the proposal to the shareholders with written notice.
***Third, the fundamental change must be approved by the shareholders. 2/3 of the shares entitled to vote
Fourth, usually, a document is delivered to the Secretary of State for filing.
B. Dissenting shareholder right of appraisal. What is it?
when do we have it
Actions by shareholders to perfect the right:
Within 20 days of the shareholder’s demand, the corporation must notify the shareholder whether it accepts or rejects the demand. If it rejects the demand, it counters with its estimate of fair value. If they cannot agree on fair value, what happens?
right to force the corp to buy your stock at fair value
- Actions by corporation to trigger the right:
a) merger;
b) sale of shares in a share exchange;
c) transfer of substantially all assets; or
d) conversion
But even if the company is doing one of these things, the right is not available if stock is listed on a national exchange or market or has 2,000 or more shareholders. In such a big corporation, there is a public market for the stock, so an unhappy shareholder can sell her stock on the market.
So the right of appraisal exists in close corporation
Actions by shareholders to perfect the right:
1) Before shareholder vote, file with the corporation written notice of objection and of intent to demand payment;
2) Abstain or vote against the proposed change; and
3) After the vote, within 20 days of notification by the corporation,
make written demand to be bought out.
shareholders sue to determine the value
II. AMENDMENT OF THE CERTIFICATE OF FORMATION
– If there are 6,000 shares entitled to vote, how many must vote for the amendment?
Say there are 6,000 shares entitled to vote, and 4,000 shares attend the meeting to consider the amendment. How many must vote “yes” for the amendment to be approved?
A. Board of director action and B. Shareholder approval. 4k 4k C. If approved, deliver the amended certificate to the Secretary of State for filing.
III. MERGERS [A Corp. and B, Inc. form A Corp. or multiple surviving entities]
A. Board of director action (both corporations), and
B. Shareholder approval. Always required from shareholders of **disappearing company.
Shareholders of the surviving company do not vote (unless their company and rights are substantially changed).
C. No shareholder approval is required if a 90 percent-or-more owned subsidiary is merged into a parent corporation. (short-form merger)
D. If approved, deliver certificate of merger to the Secretary of State for filing.
**
E. Remember the right of appraisal. It is available to shareholders of the **disappearing company in a regular merger and to shareholders of the subsidiary in a short-form merger.
**
F. Effect of merger:
the surviving company succeeds to all rights and liabilities of the disappearing company
This is called “successor liability.”
CONVERSION
Corporation can convert to another form of business organization. Requires board action and approval by 2/3 of the shares entitled to vote. Deliver certificate of conversion to the Secretary of State for filing. Dissenting shareholders can demand appraisal rights.
TRANSFER (E.G., SALE, LEASE, EXCHANGE) OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS NOT IN THE ORDINARY COURSE OF BUSINESS OR SHARE EXCHANGE (one company acquires all stock of another)
BTW: A transfer will not be “of substantially all” assets if the corporation continues to engage in the same business after the transfer.
Key point: These are fundamental corporate changes for which corporation?
seller only not buyer
S Corp. wants to sell all of its assets to B, Inc., or B, Inc. wants to acquire all the outstanding stock of S Corp.
A. Board of director action (both corporations), and
B. Approval by the ***selling corporation’s shareholders
1. Approval by 2/3 of the shares of S Corp.entitled to vote.
2. What number of shares of B, Inc. must approve the sale? 0
C. Are there dissenting shareholders rights of appraisal? Yes, for shareholders of the selling corporation only. Not for the shareholders of the buyer, because it is not a fundamental change for the buying corporation.
D. Generally, do we expect successor liability in the sale of all assets?
no; the selling corp still exist
TERMINATION
A. Voluntary termination.
A. Voluntary termination.
- Written consent of all shareholders or
- Board of director action and approval by 2/3 of the shares entitled to vote.
- After either of these is met, send notice of intent to wind up to creditors.
- Then follow the liquidation process outlined below.
- A court can revoke termination if it was fraudulent. A corporation may revoke its voluntary termination any time before its corporate existence ceases.
Administrative termination.
– Does this administrative termination require court action?
The corporation must be given at least 90 days’ notice. Why are directors and officers nervous about this sort of termination?
The Texas Secretary of State may issue a certificate of termination for corporation’s failure to pay fees or failure to maintain registered agent or to file required reports.
no; secretary of state issues
because they are personally liable for the debts incurred after termination until reinstatement
- If the corporation is not reinstated, it is treated as one that has voluntarily terminated, and proceeds to liquidation.
- Also, the comptroller of the state may forfeit a corporation’s privileges for failure to pay franchise tax or to file tax reports if the corporation does not cure the failure within 45 days of notice.
- Such forfeiture means the corporation cannot sue or defend cases in state court and each officer and director is personally liable for debts incurred after the date on which the tax was due.
B. Involuntary (court ordered) termination.
B. Involuntary (court ordered) termination.
1. Texas Attorney General can institute a proceeding for involuntary termination and winding up for: (1) fraudulent procurement of certificate; (2) ultra vires activities; (3) misrepresentation in required reports; or (4) public interest requires it. Does this happen often? no
2. Creditors can seek immediate termination based on irreparable harm to unsecured creditors.
3. Creditors can seek appointment of a receiver because the corporation is insolvent and the creditor either has an unsatisfied judgment or the company admits in writing that the amount is due.
4. A Shareholder can seek appointment of a receiver for insolvency; waste of assets; director deadlock causing irreparable harm to the company; shareholders deadlocked and have failed at two annual meetings to fill a vacant board position; or
illegal, oppressive, or fraudulent acts by director(s).
5. How long does the receiver serve? 12 months. What if things are not fixed by the end of 12 months?
the court can then order termination
6. In a close corporation, if management is so divided that action cannot be taken, a court may avoid dissolution by appointing a provisional director to break tie votes.
C. Does “termination” end the existence of the corporation right then?
– Who manages the winding up process?
E. After winding up, the corporation must deliver a certificate of termination to the Secretary of State, including statement that debts have been paid, with any remaining sums having been distributed to shareholders. What is the effect of the Secretary of State’s filing of the certificate of termination?
F. How late can claims against the corporation that arose before termination be asserted?
no; it starts a process called liquidation
– Steps in the liquidation process: (a) gather all assets, (b) convert to cash, ***(c) pay creditors, and (d) distribute remainder to shareholders, pro-rata by share unless there is a liquidation preference (means pay first, so it works like a dividend preference).
Board of directors unless the court decides to supervise
ends the corp’s existence
within 3 yrs after termination
