Fundamental Corporate Changes

Question 1

What actions by the corporation are considered fundamental corporate changes? What are shareholder’s rights in these situations?

Answer 1

These are changes that are so fundamental that most of them require both board and shareholder approval. These actions are:

1. Some amendments to the certificate;
2. Consolidation;
3. Corporation merges into another corporation;
4. Corporation transfers substantially all of its assets; or
5. Corporation’s shares are acquired in a share exchange.

If you are a shareholder that dissents from one these actions within a close corporation, this triggers the shareholder’s right of appraisal, which forces the corporation to buy the shareholder’s stock at fair market value.

Question 2

What actions need to be taken by a shareholder to perfect their right of appraisal?

Answer 2

1. Before the shareholder vote, file written objection and and intent to demand payment.
2. During the shareholder vote, the shareholder abstains or votes against the change.
3. After the vote, make a written demand to be bought out.

Question 3

How are amendments to the certificate of corporation made? Are there dissenting shareholder rights of appraisal for amendments?

Answer 3

Amendments must be approved by (1) director action and (2) a majority of the shares entitled to vote.

If the amendment will change or strike a supermajority quorum or voting requirement for shareholder voting, you need director approval plus 2/3 shares entitled to vote.

There are appraisal rights, if the amendment alters or abolishes a preference, changes redemption rights, alters or abolishes a preemptive right or limits voting rights.

Question 4

What actions are taken with a merger or consolidation? Who gets appraisal rights? What is the effect of the merger or consolidation?

Answer 4

1. Each company’s board of directors adopts a plan of merger or consolidation AND
2. Shareholder approval from each corporation.
3. Deliver certificate of merger or consolidation to Department of State for filing.

There are right of appraisal for the shareholders of the corporation that dissappears.

The effect of the merger or consolidation is that the surviving corporation succeeds to all rights and liabilities of the disappearing corporation, called successor liability.

Question 5

What actions are taken with a transfer of all or substantially all of the corporation’s assets? Are there appraisal rights for dissenting shareholders? What are the effects of a transfer?

Answer 5

Note: This is only a fundamental change for the selling corporation, not for the buying corporation.

1. Each corporation’s board of directors authorizes the deal and
2. Approval by selling corporation’s shareholders

The selling corporation’s shareholders who dissent get rights of appraisal.

No filing with Department of State is required.

Generally, the com pany acquiring assets will not be liable for the torts of the company whose assets it acquired unless (1) the deal provides otherwise, (2) the purchasing company is mere continuation of the seller, or (3) the deal was entered fraudulently to escape such obligations. It is different from a merger, because the selling company still exists, so creditors can sue - there is no successor liability here.

Question 6

How and when does a corporation dissolve?

Answer 6

There are two ways for a corporation dissolve:

1. Voluntary: no Board vote necessary, just a majority of the shares entitled to vote can vote to dissolve. Then, the certificate of dissolution delivered to the Department of State for its filing.

2. Involuntary: done through the courts

a. 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
b. Twenty percent or more of the voting shares in a close corporation may petition on one of two grounds:
i. management’s illegal, oppressive, or fraudulent acts toward complaining shareholders OR
ii. management wasting, diverting or diluting corporate assets.

The corporation may deny dissolution if there is some other way the complaining shareholder can obtain a fair return on his investment, like a buy out.