Business Law Chapter 36 Homework Fundamental Changes a Charter Amendments 1 Approval Directors

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Chapter 36

FUNDAMENTAL CHANGES

A. Charter Amendments

1. Approval by Directors and Shareholders

2. Approval by Directors

B. Combinations

1. Purchase or Lease of All or Substantially

All of the Assets

a. Regular Course of Business

b. Other Than In Regular Course of

6. Going Private Transactions

a. Cash-out Combinations

b. Management Buyout

7. Dissenting Shareholders

a. Transactions Giving Rise to

Dissenters’ Rights

b. Procedure

c. Appraisal Remedy

Cases in This Chapter

Alpert v. 28 Williams St. Corp

Shawnee Telecom Resources, Inc. v. Brown

Cooke v. Fresh Express Foods Corporation, Inc.

Chapter Outcomes

After reading and studying this chapter, the student should be able to:

Explain the procedure for amending the charter and list which

amendments give rise to the appraisal remedy.

Identify which combinations do not require shareholder approval and

TEACHING NOTES

Certain changes which affect the basic structure of a corporation are so

fundamental that they require shareholder approval. These include charter

amendments, mergers, consolidations, compulsory share exchanges,

dissolution, and sale or lease of all or most of the corporation’s assets. The

1999 amendments to the Revised Act signi’cantly changed the voting rule:

fundamental changes need only be approved by a majority of the shares

present at a meeting at which a quorum is present.

A. CHARTER AMENDMENTS

A charter may be amended, but the amended charter can contain only those

provisions that might be contained lawfully in the charter as of the time of

Approval by Directors and Shareholders

Typically the board of directors adopts a resolution setting forth the proposed

amendment, which then must be approved by a majority vote of the

shareholders entitled to vote. Then, the corporation executes articles of

*** Chapter Outcome***

Explain the procedure for amending the charter and identify which

amendments give rise to the appraisal remedy.

The Revised Act permits the board of directors to adopt these amendments

without shareholder action: (1) extending the duration of the corporation if it

was incorporated when limited duration was required by law; (2) changing

each issued and unissued authorized share of an outstanding class into a

greater number of whole shares; and (3) making minor name changes.

Dissenting shareholders are given an appraisal remedy only if an

amendment materially and adversely affects the rights attached to the

shares owned by the dissenting shareholders in one of the following ways:

Approval by Directors

The Revised Act lets the board alone adopt certain amendments, such as (1)

making minor name changes, (2) changing each issued and unissued

authorized share of an outstanding class into a greater number of whole

shares if the corporation has only one class of shares, and (3) extending the

duration of a corporation that was incorporated when limited duration was

required by law.

B. COMBINATIONS

A few States and the 1999 amendments to the Revised Act have provisions

authorizing a corporation to merge into another type of business

organization, such as a limited partnership, limited liability company, or a

limited liability partnership. There are many strategic reasons for one

corporation to combine with another, and there are several methods for

combining.

In July of 2010, President Obama signed into law the Dodd-Frank Wall Street

Reform and Consumer Protection Act (Dodd-Frank Act), the most signi’cant

change to U.S. ‘nancial regulation since the New Deal. One of the many

stand-alone statutes included in the Dodd-Frank Act is the Investor Protection

*** Chapter Outcome***

Identify which combinations do not require shareholder approval and

give dissenting shareholders an appraisal remedy.

Purchase or Lease of All or Substantially All of the Assets

When one corporation buys or leases all of another corporation’s assets,

each corporation retains its legal personality and continues its existence.

Only the ownership of the physical assets changes. (Typically, however, the

corporation selling all of its assets will then dissolve.)

Regular Course of Business — For the selling company, if the sale or

lease of all of its assets is within the regular course of its business, approval

by the board is required but shareholder approval is not.

Other than In Regular Course of Business — If the sale or lease of all

assets is not in the usual course of business, then this very signi’cant

Purchase of Shares

When one corporation purchases all or a controlling interest of the stock of

another corporation, the legal existence of neither corporation changes. The

acquiring corporation acts through its board of directors, whereas the

corporation that becomes a subsidiary does not act at all, because the

individual shareholders, not the corporation, make the decision to sell their

stock. Because no formal shareholder approval of either corporation is

required, there is no appraisal remedy.

Sale of Control — When one or a few shareholders own a controlling

interest, they may privately negotiate a sale of such interest, though they

must do so with due care.

*** Chapter Outcome***

Distinguish between a tender offer and a compulsory share exchange.

Tender offer — When stock ownership in the corporation being purchased

is widely dispersed, the acquiring corporation may make a tender offer —

that is, a general invitation to all shareholders of the target company to

tender their shares for sale at a speci’ed price. Shareholders are free to

choose whether to tender their shares or not. Tender offers for publicly held

companies are subject to federal securities regulation.

Compulsory Share Exchange

One corporation becomes the owner of all the outstanding shares of one or

more classes of shares of another corporation by an exchange that is

compulsory on all owners of the acquired shares — allowed by the Revised

Merger

Two corporations combine all of their assets; one survives and the other

ceases to exist. The surviving corporation assumes the debts and other

liabilities of the merged corporation. A merger must be approved by each

corporation’s board of directors and a majority of each corporation’s voting

shareholders. Many States and the 1999 amendments to the Revised Act

permit the vote of the shareholders of the surviving corporation to be

eliminated when a merger increases the number of outstanding shares by no

more than twenty percent. Dissenting shareholders of each corporation

have an appraisal remedy.

In a short-form merger, a corporation that already owns at least a statutorily

speci’ed percent of the outstanding shares of each class of a subsidiary may

merge the subsidiary into itself without approval by the shareholders of

either corporation. Dissenting shareholders of the subsidiary have the

appraisal remedy.

Consolidation

This is a combination of all of the assets of two corporations. Each

corporation ceases to exist, and a new corporation comes into existence,

*** Chapter Outcome***

Compare and contrast a cash-out combination and a management buyout.

Going Private Transactions

These are used to take a publicly held corporation private, thereby

eliminating minority interests and reducing the burdens of compliance with

federal securities laws. There are several methods of taking a corporation

private.

CASE 36-1

ALPERT v. 28 WILLIAMS ST. CORP.

New York Court of Appeals, 1984

63 N.Y.2d 557,483 N.Y.S.2d 667,473 N.E.2d 19

http://scholar.google.com/scholar_case?

q=473+N.E.2d+19&hl=en&as_sdt=2,34&case=6454009735176964074&scilh=0

Cooke, C. J.

The subject of contention in this litigation is a valuable 17-story office building, located at

79 Madison Avenue in Manhattan [New York]. In dispute is the propriety of a complex

series of transactions that had the net effect of permitting defendants, who were outside

investors, to gain ownership of the property and to eliminate the ownership interests of

plaintiffs, who were minority shareholders of the corporation that formerly owned the

building. This was achieved through what is commonly known as a “two-step” merger: (1)

the outstanding shares. The remaining shares were owned by persons who are not parties to

this litigation.

Defendants, a consortium of investors, formed a limited partnership, known as Madison

28 Associates (Madison Associates), for the purpose of purchasing the building. * * *

Madison Associates formed a separate, wholly owned company, 28 Williams Street

Corporation (Williams Street), to act as the nominal purchaser and owner of the Kimmelman

and Zauderer interests. * * *

* * *

The plaintiffs instituted this action * * * [seeking] rescission of the merger.

The propriety of the merger was contested on several grounds. It was contended that the

merger was unlawful because its sole purpose was to personally benefit the partners of

Madison Associates and that the alleged purposes had no legitimate business benefit inuring

to the corporation. Plaintiffs argue that the “business judgment” of the directors in assigning

various purposes for the merger was indelibly tainted by a conflict of interest because they

were committed to the merger prior to becoming directors and were on both sides of the

merger transaction when consummated. Further, they assert that essential financial

information was not disclosed and that the value offered for the minority’s shares was

understated and determined in an unfair manner.

* * *

On this appeal, the principal task facing this court is to prescribe a standard for

evaluating the validity of a corporate transaction that forcibly eliminates minority

shareholders by means of a two-step merger. It is concluded that the analysis employed by

the courts below was correct: the majority shareholders’ exclusion of minority interests

through a two-step merger does not violate the former’s fiduciary obligations so long as the

transaction viewed as a whole is fair to the minority shareholders and is justified by an

independent corporate business purpose. Accordingly, this court now affirms.

* * *

Generally, the remedy of a shareholder dissenting from a merger and the offered

“cash-out” price is to obtain the fair value of his or her stock through an appraisal

proceeding [citation]. This protects the minority shareholder from being forced to sell at

unfair values imposed by those dominating the corporation while allowing the majority to

proceed with its desired merger [citations]. The pursuit of an appraisal proceeding generally

constitutes the dissenting stockholder’s exclusive remedy [citations]. An exception exists,

however, when the merger is unlawful or fraudulent as to that shareholder, in which event an

action for equitable relief is authorized [citations]. Thus, technical compliance with the

Business Corporation Law’s requirements alone will not necessarily exempt a merger from

further judicial review.

* * *

* * * In reviewing a freeze-out merger, the essence of the judicial inquiry is to determine

whether the transaction, viewed as a whole, was “fair” as to all concerned. This concept has

two principal components: the majority shareholders must have followed “a course of fair

dealing toward minority holders” * * * and they must also have offered a fair price for the

minority’s stock. * * *

* * *

Fair dealing is also concerned with the procedural fairness of the transaction, such as its

timing, initiation, structure, financing, development, disclosure to the independent directors

The fairness of the transaction cannot be determined without considering the component

of the financial remuneration offered the dissenting shareholders. * * *

In determining whether there was a fair price, the court need not ascertain the precise

“fair value” of the shares as it would be determined in an appraisal proceeding. It should be

noted, however, that the factors used in an appraisal proceeding are relevant here. * * * This

would include but would not be limited to net asset value, book value, earnings, market

* * *

In the context of a freeze-out merger, variant treatment of the minority shareholders—

i.e., causing their removal—will be justified when related to the advancement of a general

corporate interest. The benefit need not be great, but it must be for the corporation. For

example, if the sole purpose of the merger is reduction of the number of profit sharers—in

contrast to increasing the corporation’s capital or profits, or improving its management

structure—there will exist no “independent corporate interest” [citation]. All of these

purposes ultimately seek to increase the individual wealth of the remaining shareholders.

What distinguishes a proper corporate purpose from an improper one is that, with the

former, removal of the minority shareholders furthers the objective of conferring some

* * *

Without passing on all of the business purposes cited by [the trial court] as underlying

the merger, it is sufficient to note that at least one justified the exclusion of plaintiff’s

interests: attracting additional capital to effect needed repairs of the building. There is proof

that there was a good-faith belief that additional, outside capital was required. Moreover,

Dissenting Shareholders

Transactions Giving Rise to Dissenters’ Rights — A shareholder has a

right to dissent to a sale or lease of substantially all corporate assets, any

merger or consolidation plan, a compulsory share exchange in which his

corporation is to be acquired, amendments to the charter which adversely

affect him, or any other corporate action which adversely affects payment

for his shares.

Procedure — A shareholder who dissents and strictly complies with the

provisions of the statute is entitled to receive fair value for his shares.

Entitlement to payment must be preceded by a written objection to the

board requesting a shareholder vote, a refusal to vote in favor of the

proposed action, and a written demand for payment on a form provided by

the corporation.