(20) Fundamental Changes in the Corporate Structure

What is a merger?

A transaction in which one corporation is absorbed into another, and the surviving corporation issues its shares or other securities to the transferor corporation's shareholders.

What happens to the shareholders of the transferor corporation in a merger?

They become shareholders of the surviving corporation.

What is a consolidation?

A transaction in which two or more existing corporations combine to form a wholly new corporation.

Are the procedures for mergers and consolidations generally the same?

Yes.

What shareholder approval is generally required for a merger or consolidation?

Approval by two-thirds or a majority of the outstanding shares, depending on the jurisdiction.

What is a short-form merger?

A merger between a parent and subsidiary that generally does not require shareholder approval.

What is a small-scale merger?

A merger in which the surviving corporation issues only a limited amount of stock so shareholder approval may not be required.

What is the effect of a merger?

The transferor corporation ceases to exist, and the surviving corporation succeeds by operation of law to all rights, assets, and liabilities of the transferor.

What are appraisal rights?

The right of dissenting shareholders to require the corporation to purchase their shares at fair market value.

When do appraisal rights generally arise?

When a shareholder dissents from a fundamental corporate change.

What is the purpose of appraisal rights?

To protect shareholders from being forced to remain invested after a fundamental corporate change.

What types of corporate actions generally trigger appraisal rights?

Mergers, consolidations, sales of substantially all corporate assets outside the ordinary course of business, and amendments changing the corporation's business purpose.

What must a shareholder do before the vote to preserve appraisal rights?

File a written notice of objection and a statement of intent to demand payment.

What must a shareholder do after the transaction is approved to preserve appraisal rights?

Not vote in favor of the transaction and demand payment of the fair market value of the shares.

What happens if the parties cannot agree on the fair market value of the shares?

A court-appointed appraiser determines the fair market value through an appraisal proceeding.

Do appraisal rights apply to unauthorized corporate actions?

No.

What may a shareholder do if the corporate action is unauthorized?

Attack the validity or fundamental fairness of the transaction instead of pursuing appraisal rights.

From what funds should appraisal rights generally be paid?

Surplus.

When may appraisal rights be paid from stated capital?

When the corporation demonstrates a legitimate purpose and good faith.

When do appraisal rights generally not apply because of the market-out exception?

When the stock is listed on a national securities exchange or the corporation has many shareholders.

Do shareholders of the surviving parent corporation generally have appraisal rights in a short-form merger?

No.

Do shareholders of the surviving corporation generally have appraisal rights in some small-scale mergers?

No.

What is a takeover?

The acquisition of control of a corporation through the purchase of its outstanding shares.

Does a takeover generally require shareholder approval?

No, unless the buyer seeks to amend the articles of incorporation.

Do appraisal rights generally arise in a takeover?

No.

What did CTS Corp. v. Dynamics Corp. of America hold?

A state may require delays and shareholder approval procedures to regulate hostile takeovers.

What is a tender offer?

A public offer to purchase a corporation's shares from its shareholders at a premium over market price.

Is a tender offer considered a corporate transaction from the target corporation's perspective?

No.

Do tender offers generally give rise to shareholder voting rights?

No.

Do tender offers generally create appraisal rights?

No, unless the transaction amounts to a de facto merger.

When must a Schedule 13(d) filing be made?

Within 10 days after becoming the beneficial owner of more than 5% of a class of registered securities.

Does a bidder's tender offer generally require approval by the bidder's shareholders?

No.

When may a tender offer create appraisal rights for the bidder's shareholders?

When the transaction amounts to a de facto merger.

What federal law regulates tender offers?

The Williams Act.

What does Section 13(d) of the Williams Act require?

Filing within 10 days after becoming the beneficial owner of more than 5% of a class of registered securities.

What does Section 14(d) require?

The person making the tender offer must provide an information statement and keep the offer open for at least 20 days.

What does Section 14(e)-2 require?

The target corporation's management must issue a statement of its position regarding the tender offer.

What does Section 14(e) prohibit?

Material omissions or misleading statements made in connection with any tender offer.

What level of culpability do most courts require under Section 14(e)?

Knowledge of falsity or reckless disregard for the truth.

When is an omitted fact material under Section 14(e)?

When there is a substantial likelihood that it would have assumed actual significance in a shareholder's deliberations.

What reliance must a shareholder generally prove under Section 14(e)?

The shareholder relied on the misrepresentation or omission.

When is reliance often presumed under Section 14(e)?

In omission cases where reliance is difficult to prove.

When will a material omission not support a Section 14(e) action?

When the tender offer is voluntarily withdrawn because reliance is impossible.

Who has standing to recover damages under Section 14(e)?

The target corporation and both tendering and non-tendering shareholders.

Does the offeror have standing to recover damages under Section 14(e)?

No.

What must a plaintiff prove to recover damages under Section 14(e)?

Standing, injury, and that the injury was caused by the defendant's conduct or by reliance on the misrepresentation or omission.

What must a plaintiff show to obtain an injunction under Section 14(e)?

A substantial probability that a violation occurred or that irreparable injury will occur.

What did United States v. O'Hagan hold?

Using material nonpublic information relating to a tender offer to trade securities violates SEC Rule 14e-3(a).

What is dissolution?

The termination of the corporation's legal existence.

What is voluntary dissolution?

Dissolution initiated by incorporators before issuance, shareholders, or corporate action.

What steps are required for voluntary dissolution?

Board approval of a dissolution plan, shareholder approval by a majority or two-thirds of the outstanding shares, and filing a certificate of dissolution with the appropriate state office.

What fiduciary duty limits voluntary dissolution?

The majority must exercise its power consistently with its fiduciary duty to minority shareholders.

What is involuntary dissolution?

Dissolution ordered by a court or initiated by authorized parties because of specified misconduct or circumstances.

When may the state seek involuntary dissolution?

When the corporation exceeds or abuses its authority, procures its articles fraudulently, acts ultra vires, or functions as a sham.

What proceeding may the state use to seek involuntary dissolution?

A quo warranto proceeding.

When may shareholders or directors seek involuntary dissolution?

For fraud, oppression, deadlock, irreparable injury, waste, or illegal or fraudulent acts.

When may creditors seek involuntary dissolution?

When they have an unsatisfied judgment that the corporation is unwilling or unable to satisfy.

What is liquidation?

The winding up of corporate affairs by collecting assets, paying creditors, and distributing the remaining assets to shareholders.

Does dissolution immediately terminate the corporation's business?

No.

How long may a dissolved corporation generally continue to sue and be sued while winding up?

Two years.

Who manages the corporation during the liquidation period?

The board of directors.

Who is paid first during liquidation?

The corporation's creditors.

How are remaining assets distributed after creditors are paid?

Preferred shareholders receive their liquidation preferences first, and common shareholders receive the remaining property or cash.

What is required to amend the articles of incorporation?

A board resolution, shareholder notice, approval by a majority or two-thirds of the outstanding shares, and filing with the Secretary of State.

What controls if the articles conflict with the bylaws?

The articles of incorporation.

What caveat applies to amendments of the articles?

Every amendment must be fundamentally fair to all shareholders.

What is required to amend the bylaws?

A board amendment approved by a simple majority of the voting shares.

May shareholders repeal a bylaw amendment?

Yes.

How may shareholders repeal a bylaw amendment?

By calling a meeting and voting to repeal it.

Testable Issue:What distinguishes a merger from a consolidation?

A merger leaves one surviving corporation, while a consolidation creates a new corporation.

Testable Issue:When do appraisal rights arise?

When dissenting shareholders oppose certain authorized fundamental corporate changes.

Testable Issue:What steps must a shareholder take to preserve appraisal rights?

File a written objection before the vote, avoid voting in favor of the transaction, and demand payment after approval.

Testable Issue:When are appraisal rights unavailable?

When the action is unauthorized or falls within an exception such as the market-out rule, certain short-form mergers, or some small-scale mergers.

Testable Issue:Do takeovers and tender offers generally require shareholder approval or create appraisal rights?

No, unless special statutes apply or the transaction constitutes a de facto merger.

Testable Issue:What disclosures are required under the Williams Act?

Section 13(d) ownership filings, Section 14(d) tender offer disclosures, Section 14(e)-2 management responses, and compliance with Section 14(e)'s anti-fraud provisions.

Testable Issue:What are the grounds for involuntary dissolution?

State abuse of corporate authority, shareholder or director claims of fraud, oppression, deadlock, waste, illegal acts, or creditor actions based on unsatisfied judgments.

Testable Issue:What is the difference between dissolution and liquidation?

Dissolution ends the corporation's legal existence, while liquidation is the process of winding up its affairs.

Testable Issue:What is required to amend the articles of incorporation?

Board approval, shareholder notice, shareholder approval, filing with the Secretary of State, and fundamental fairness.

Testable Issue:How are bylaws amended?

By board action approved by a simple majority of the voting shares, subject to shareholder repeal.

Essay Rule:How do you analyze a fundamental corporate change?

Identify the type of corporate change, determine the required approvals, analyze whether appraisal rights apply and whether the shareholder preserved them, evaluate any takeover or tender offer rules, determine whether dissolution or liquidation procedures are satisfied, and verify compliance with amendment requirements and fiduciary duties.

Master Synthesis:What is the framework for analyzing fundamental corporate changes?

Identify the transaction, determine the required corporate and shareholder approvals, evaluate appraisal rights and exceptions, analyze takeover or tender offer regulations if applicable, determine whether dissolution or liquidation requirements are met, and verify compliance with amendment procedures and fiduciary duties.