What is a fundamental corporate change?
Fundamental corporate changes are extraordinary changes, so the board generally cannot do them alone.
What are the main types of fundamental corporate changes?
- Amending the articles
- Merging or consolidating into another company
- Transferring substantially all assets (or having stock acquired in a “share exchange”)
- Converting to another form of business
- Dissolving
What are the main procedural requirements for any fundamental corporate change?
- Board action adopting a resolution of fundamental change
- Board submits proposal to shareholders with written notice
- Shareholder Approval — Need majority of shares entitled to vote (higher requirement than majority of shares present)
What is a Dissenting Shareholder Right of Appraisal:
If a corporation approves certain fundamental corporate changes, the shareholders who did not vote in favor of the change may have appraisal rights. The dissenting shareholder right of appraisal is the right of a shareholder to force the corporation to buy their stock for fair value.
Only certain fundamental corporate changes will trigger the right of appraisal:
- Merging or consolidating
- Transferring substantially all assets
- Stock being acquired in a share exchange
- Converting to another form of business
What is the Market-Out Exception?
Market-Out Exception: Appraisal rights are not available to the holders of shares of publicly held companies (companies whose shares are listed on a national securities exchange or market, or a national quotation system) or of corporations with at least 2,000 shareholders and the shares of the class or series involved have a value of at least $20 million
- This means that the right of appraisal really ONLY exists in close corporations
What procedure must be followed for a shareholder to perfect a right of appraisal?
For a shareholder to perfect a right of appraisal:
- Corporation Must Give Shareholders Notice: If a proposed corporate action will create dissenters’ rights, the notice of the shareholders’ meeting at which a vote on the action will be taken must state that the shareholders will be entitled to exercise their dissenting rights
- Shareholder Must Give Written Notice of Intent to Demand Payment
- Corporation Must Give Dissenters Notice: If the action is approved, the corporation must notify, within 10 days after approval, all shareholders who filed an intent to demand payment.
Do shareholders have dissenting rights of appraisal with article amendments?
No, shareholders generally do not have dissenting rights of appraisal for amendments of the articles.
What is the difference between merger, share exchanges, and conversion?
Merger: The blending of one or more corporations into another corporation, and the latter corporation survives while the merging corporations cease to exist following the merger.
Share Exchange: One corporation purchases all of the outstanding shares of one or more classes or series of another corporation.
Conversion: One business entity changes its form into another business entity, such as a corporation changing into an LLC or a partnership.
How are mergers, share exchanges, and conversions different from the traditional basic fundamental change procedure?
Mergers, share exchanges, and conversions vary a little from the basic fundamental change procedure in that not all shareholders have a right to approve these procedures under all circumstances.
When dealing with a merger, when is approval not needed from all the shareholders?
No Significant Change to Surviving Corp — Approval by shareholders of the surviving corporation on a plan of merger is not required if all the following conditions exist:
- Articles of incorporation of surviving corporation will not differ from the articles before the merger
- Each shareholder of the survivor whose shares were outstanding immediately prior to the effective date of the merger will hold the same number of shares, with identical preferences, limitations, and rights
- The voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corporation that were outstanding immediately prior to the merger.
When dealing with a share exchange, when is approval from all shareholders required?
In a share exchange, only the shareholders of the corporation whose shares will be acquired in the share exchange need approve; a share exchange is not a fundamental corporate change for the acquiring corporation. Notice requirements are the same as for amendment of the articles.
When dealing with a conversion, when is approval from all shareholders required?
The procedure for effecting a conversion generally is the same as the procedure for approving a merger in which the converting corporation is not the survivor
What is the effect of a merger vs. a share exchange?
Merger: The surviving corporation succeeds to all rights and liabilities of the constituents. So a creditor of that corporation can sue the survivor. This is known as successor liability.
Share Exchange: When a share exchange takes effect, the shares of each acquired corporation are exchanged as provided in the plan, and the former holders of the shares are entitled only to the exchange rights provided in the plan. The corporations remain separate.
What are the two main ways that a corporation can be voluntarily dissolved?
- Dissolution by Incorporators or Initial Directors: If shares have not yet been issued or business has not yet been commenced, a majority of the incorporators or initial directors may dissolve the corporation by delivering articles of dissolution to the state.
- Dissolution by Corporate Act: The corporation may dissolve by a corporate act approved under the fundamental change procedure.
What is the effect of a corporate dissolution?
A corporation that has been dissolved continues its corporate existence but is not allowed to carry on any business except as appropriate to wind up and liquidate its affairs. Creditors must be notified so they can make any claims.
Can claims against a corporation be barred after dissolution?
After dissolution, claims can still be filed against a corporation to the extent of the corporation’s undistributed assests. If the assets have been distributed to the shareholders, a claim can be asserted against each shareholder for his pro rata share of the claim, to the extent of the assets distributed to him.
- Cutting Time for Known Claims — A corporation can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claim.
- Cutting Time for Unknown Claims — The time for filing unknown claims can be limited to three years by publishing notice of the dissolution in a newspaper in the county where the corporation’s known place of business is located.
What parties/individuals may seek involuntary dissolution by court order?
- Attorney General: The attorney general may seek judicial dissolution of a corporation on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority.
- Shareholders
- Creditors
When can a shareholder petition for involuntary corporate dissolution?
Shareholders may petition for involuntary dissolution on any of the following grounds:
- Director abuse, waste or assets, or misconduct
- The directors are deadlocked in the management of corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened, or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock
- Shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates
- The corporation has abandoned its business and failed to dissolve within a reasonable time.
When can a creditor petition for involuntary dissolution?
Creditors may seek judicial dissolution if:
- The creditor’s claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corporation is insolvent OR
- The corporation has admitted in writing that creditor’s claim is due and owing and the corporation is insolvent.
What is adminstrative dissolution?
The state may bring an action to administratively dissolve a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state.
- The state must serve the corporation with written notice of the failure.
- If the corporation does not correct the grounds for dissolution or show that the grounds do not exist within 60 days after service of notice, the state effectuates the dissolution by signing a certificate of dissolution.
- A corporation that is administratively dissolved may apply for reinstatement within two years after the effective date of dissolution. The application must state that the grounds for dissolution either did not exist or have been eliminated.
What is the Winding Up Process?
Dissolution is not the end of the corporation. It is the beginning of a process that will end the corporate existence. The corporation continues to exist, so it can sue and be sued. It cannot start new business but must wind up (liquidate).
What are the main steps that must be taken to wind up the corporation?
- Give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its principal place of business;
- Gather all assets;
- Convert assets to cash;
- Pay creditors; AND
- Distribute any remaining sums to shareholders, pro rata by share, unless there is a liquidation preference.
What are Liquidation Preferences?
Liquidation preferences mean, in short, “pay first.” They work like a dividend preference. The articles may set out a dividend preference or liquidation preference, if any.
NOTE — Liquidation preferences may be relevant to insolvency.
