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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.
