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– 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

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

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

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

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

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

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

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

Leveraged Buyout (LBO)

• Involves a large amount of borrowed money

• Bridge Loans

• Junk Bonds

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

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