Extraordinary corporate transactions: Mergers, consolidations, share exchanges, and more

While the day-to-day running of the corporation rests with the officers and the strategic direction is the purview of the directors, shareholders have a say in any structural changes within a corporation that affect their ownership rights. These extraordinary corporate activities are all regulated by special statutory procedures. For example, shareholder approval may be required, documents may have to be filed with the state, and dissenters’ rights may have to be granted.

Mergers, consolidations, and share exchanges combine corporations and business organizations

Mergers, consolidations, and share exchanges are three statutory methods by which two or more corporations, or one or more corporations and one or more other business organizations can be combined. The corporations or unincorporated entities that are entering into a business combination are called the constituents.

A merger occurs when two or more constituent business organizations combine and one of them continues as the same legal entity it was before the transaction. The entity that continues is referred to as the “survivor.” The corporation or unincorporated entity which has merged is called the “merged” or “transferor” entity. The merged entity disappears and its existence terminates. The assets of the merged entity are transferred to the survivor. The survivor also assumes the merged entity’s liabilities.

Corporations may merge with other corporations. This is known as a “like” or “same” entity merger. A corporation may enter into this type of merger to buy or sell off companies or reorganize its operations. Corporations may also merge with other business entities such as limited partnerships and limited liability companies. This is known as a “cross” or “inter-species” merger. It can be used, among other purposes, to change to a different type of business entity.

Two or more constituents may also combine to form a new corporation or unincorporated entity with the constituents ceasing to exist. The new corporation or entity is referred to as the “resulting” corporation or entity. Historically, this transaction was called a consolidation. Many corporation statutes still use that term but some make no distinction between mergers and consolidations. In a consolidation, the assets of the constituents are transferred by operation of law to the resulting entity. The resulting entity also assumes all of the constituents’ liabilities. Consolidations are provided for by some, but not all, corporation statutes.

The third form of statutory business combination is the share exchange. A share exchange is a transaction in which neither corporation ceases to exist. Instead, one corporation acquires some or all of the shares of the other corporation.

Mergers, consolidations, and share exchanges involve multiple steps

A corporation must follow statutory procedures in order to effect a merger, consolidation, or share exchange.

First, the corporation's board of directors must approve the plan of merger, consolidation, or share exchange. The plan must set forth the terms and conditions of the proposed transaction.

Next, the merger plan usually is submitted to the corporation’s shareholders for their approval. Whether shareholder approval is required depends upon the impact of the transaction on the shareholders' ownership interested. The shareholders of a merged or consolidating corporation must always approve the merger plan. The shareholders of the corporation that survives a merger must approve if the merger will significantly affect their ownership interests. A share exchange must be approved by the shareholders of the corporation whose shares are being exchanged. Most statutes provide that a majority vote is needed to approve a merger, consolidation, or share exchange, unless otherwise provided in the articles of incorporation.

After shareholder approval has been obtained, articles of merger, consolidation, or share exchange must be filed with the appropriate state official. The state’s corporation law will set forth the information the articles must contain. Generally, the articles must either contain the plan of merger, consolidation, or share exchange or state that the plan is being kept at an office of the survivor and include the address and a statement that it will be made available to shareholders of the constituents. The articles also generally include the number of shares entitled to vote, and the number of votes cast for and against the plan.

The states will accpet the articles if they meet the statutory requirements and all fees have been paid. Depending on the state, the transaction becomes effective when the articles are filed or when a certificate of merger, consolidation, or share exchange is issued. Most states also allow a delayed effective date to be set forth in the plan or articles.

Parent-subsidiary mergers don't require shareholder approval

State corporation laws have a special provision for when a parent corporation that owns all or almost all of the shares of a subsidiary, decides to merge that subsidiary into itself. In such a case, the parent may enter into the merger without the approval of either corporations’ shareholders. This is called a short-form merger. Generally, the parent will have to own at least 90% of the subsidiary’s stock to enter into a short-form merger.

In a short-form merger, the plan of merger only has to be adopted and approved by the board of directors of the parent corporation. Approval of the merger by the subsidiary’s shareholders is considered unnecessary because the parent’s share ownership is sufficient to ensure that it will be approved. Approval by the parent’s shareholders is also unnecessary because the merger does not materially change their rights.

Conversion changes the entity's type

A statutory conversion is a transaction in which a business entity changes from one form to another— such as a corporation converting to a limited liability company. Conversion eliminated the need to statutorily dissolute and re-form an ongoing enterprise. Virtually all states permit conversions from one entity type to another, although the rules governing these changes vary. 

Asset sales outside of the normal course of business

A corporation may not sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property, other than in the usual and regular course of business, unless the proposed transaction is submitted by the board of directors to the shareholders and the shareholders approve. This prevents the corporation from achieving the same result as in a merger or dissolution without obtaining shareholder consent. No filing is required to be made with the state to effect the asset sale.

Unless the articles of incorporation so require, no shareholder approval is needed to sell, lease, exchange, or otherwise dispose of all, or substantially all, property in the usual and regular course of business, or to mortgage or pledge all of the corporation’s property, whether or not the loan it secures is in the ordinary course of business, or to transfer any or all property to a wholly-owned subsidiary.

Amendments to the articles of incorporation

Any corporation may, within statutory guidelines, amend its articles of incorporation by adding a new provision, modifying an existing provision, or deleting a provision in its entirety.

Some statutes specifically list some of the amendments that can be made. These lists are partial and intended for illustrative purposes only. These lists generally provide that a corporation may change its name, its period of duration, its purposes and the number of its authorized shares. It may also change the number of par value shares, change par value shares to no par value shares and no par value to par value shares, change the designations, preferences, limitations or other rights of its shares, create or eliminate classes or series of shares, increase or restrict its directors’ authority, etc.

Most states allow a corporation’s board of directors to adopt certain amendments that are considered routine or housekeeping, without any shareholder action. These amendments include extending a corporation’s duration if it was formed when limited duration was required by law, deleting the names and addresses of initial directors and initial registered agents and offices, changing issued and unissued shares of an outstanding class into a greater number of whole shares if the corporation has only shares of that class outstanding, and substituting one corporate indicator or geographical reference in the corporation’s name for another.

In many states, if a corporation has not yet issued shares, an amendment may be adopted by the incorporators or the initial board of directors. For all other amendments, the board of directors must submit the proposed amendment to the shareholders and the share-holders must then approve.

After an amendment has been adopted, it is set forth in articles of amendment which must be filed with the appropriate state official. The amendment becomes effective upon filing, or upon a later date as specified in the amendment. Many states request the original articles of incorporation and all amendments in order to register to do business in that state (foreign qualification). 

Restated articles of incorporation consolidate amendments

The statutes allow a corporation to restate its articles of incorporation. This allows all past amendments to be consolidated with the original articles into a new document that supersedes the original articles and all filed amendments. This helps eliminate confusion when there have been multiple amendments to the same provisions over time. It also can save money when the corporation has to order certified copies of its articles and all amendments thereto.

A corporation’s board of directors may restate its articles of incorporation without shareholder approval as long as the restatement does not include any substantive amendments. If the restatement includes one or more amendments, then shareholder approval will have to be obtained. For the restatement to be effective, the corporation must file articles of restatement with the state.

Dissolution results in termination of corporation's existence

Dissolution involves the termination of a corporation’s status as a legal entity. A corporation’s legal status does not end when it stops doing business. A corporation must comply with state regulations in order to legally terminate its existence. There are two categories of dissolution—voluntary and involuntary.

• Voluntary dissolution occurs as the result of a decision by the corporation.
• Involuntary dissolution occurs when the corporation is forced to dissolve. There are two types of involuntary dissolution—administrative and judicial. In many states, a corporation may be dissolved by its incorporators or its initial directors (if they were named in the articles of incorporation) as long as no shares were issued and no business was transacted.

Voluntary dissolution. A corporation that has issued shares or transacted business may voluntarily dissolve by having its board of directors adopt a resolution proposing to dissolve and then allowing the shareholders to vote on the resolution. Once dissolution has been approved by the shareholders, the corporation must wind up its affairs. During this period the corporation may collect its assets, dispose of properties that will not be distributed to its shareholders, discharge its liabilities, distribute its remaining property to its shareholders and do any other act necessary to wind up its affairs. It may not conduct business.

Once the corporate formalities have been completed, the corporation must file Articles of Dissolution, although the timing required differs from state to state.

In some states, a corporation must file a statement of intent to dissolve before it begins winding up. In these states, Articles of Dissolution may not be filed until all of the corporation’s debts, liabilities and obligations have been taken care of and its remaining assets have been distributed to its shareholders. However, other states provide that Articles of Dissolution may be filed at any time after the dissolution was authorized. No notice of intent is required. These states provide that a dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs.

Administrative dissolution. A corporation may be administratively dissolved by the Secretary of State if it fails to comply with certain requirements of the state’s corporation law. Generally, a corporation may be administratively dissolved for failing to pay franchise taxes, failing to file an annual report, failing to maintain a registered agent or office, or for failing to notify the state of a change in registered agent or office. 

Many failures to comply with these statutory requirements occur inadvertently and may be corrected if brought to the corporation’s attention. Therefore, the states will notify each corporation subject to administrative dissolution and give them a certain period of time to comply with the statutes. Most states allow a corporation that has been administratively dissolved to apply for reinstatement. In order to be reinstated, a corporation must file all past-due annual reports, pay all taxes, interest and penalties, and otherwise comply with the requirements it had not met. The corporation must also file an application for reinstatement. A corporation that is reinstated may resume carrying on its business as before dissolution.

Judicial dissolution. A court may involuntarily dissolve a corporation at the request of the state’s attorney general, a shareholder, or a creditor. Judicial dissolution may be granted in a proceeding by the attorney general if the corporation obtained its articles of incorporation by fraud or if it exceeded or abused its authority. A shareholder may generally seek judicial dissolution where management was deadlocked, resulting in irreparable injury to the corporation, where management engaged in illegal, oppressive or fraudulent conduct, where the shareholders were deadlocked and unable to elect directors, or where corporate assets were being misapplied or wasted. A creditor may request judicial dissolution if the corporation is insolvent and the corporation has either admitted that the creditor’s claim is due and owing or the creditor’s claim has been reduced to judgment and the execution on the judgment returned unsatisfied.