Changes And Challenges Faced By Corporations
Amendments The most straightforward and common changes faced by corporations are amendments to their bylaws and articles. The directors or incorporators initially adopt the bylaws. After that, the shareholders or directors, or both, hold the power to repeal or amend the bylaws, usually at shareholders' meetings and subject to a corporation's voting regulations. Those who hold this power can adopt or change quorum requirements; prescribe procedures for the removal or replacement of directors; or fix the qualifications, terms, and numbers of directors. Most modern statutes limit the authority to amend articles only by requiring that an amend ment would have been legal to include in the original articles. Some statutes shield minority shareholders from harmful majority-approved amendments.
Mergers and Acquisitions A merger or acquisition generally is a transaction or device that allows one corporation to merge into or to take over another corporation. MERGERS AND ACQUISITIONS are complicated processes that require the involvement and approval of the directors and the shareholders.
In a merger or consolidation, two corporations become one by either maintaining one of the original corporations or creating a new corporation consisting of the prior corporations. Where statutes authorize these combinations, these changes are called statutory mergers. The statutes allow the surviving or new corporation to automatically assume ownership of the assets and liabilities of the disappearing corporation or corporations.
Statutes protect shareholder interests during mergers, and state courts assess these combinations using the fiduciary principles that are applied in self-dealing transactions. Most statutes require a majority of the shareholders in order to approve a merger; some require two-thirds. Statutes also allow shareholders to dissent from such transactions, to have a court appraise the value of their stake, and to force payment at a judicially determined price.
Mergers can involve sophisticated transactions that are designed simply to combine corporations or to create a new corporation or to eliminate minority shareholder interests. In some mergers, an acquiring corporation creates a subsidiary as the form for the merged or acquired entity. A subsidiary is a corporation that is majority-owned or wholly owned by another corporation. Creating a subsidiary allows an acquiring corporation to avoid responsibility for an acquired corporation's liabilities, while providing shareholders in the acquired corporation with an interest in the acquiring corporation.
Mergers also can involve parent corporations and their subsidiaries. A similar, though distinct, transaction is the sale, lease, or exchange of all or practically all of a corporation's property and assets. The purchaser in such a transaction typically continues operating the business, although its scope may be narrowed or broadened. In most states, shareholders have a statutory right of dissent and appraisal in these transactions, unless the sale is part of ordinary business dealings, such as issuing a mortgage or deed of trust covering all of a corporation's assets.
Not all business combinations are consensual. Often, an aggressor corporation will use takeover techniques to acquire a target corporation. Aggressor corporations primarily use the cash tender offer in a takeover: The aggressor attempts to persuade the target corporation's shareholders to sell, or tender, their shares at a price that the aggressor will pay in cash. The aggressor sets the purchase price above the current market price, usually 25 to 50 percent higher, to make the offer attractive. This practice often requires the aggressor to assume significant debts in the takeover, and these debts often are paid for by selling off parts of the target corporation's business.
Restraints and protections exist for these situations. In takeovers of registered or large, publicly held corporations, federal law requires the disclosure of certain information, such as the source of the money in the tender offer. In smaller corporations, a controlling shareholder, who holds a majority of a corporation's shares, may not transfer control to someone outside the corporation without a reasonable investigation of the potential buyer. A controlling shareholder also may not transfer control where there is a suspicion that the buyer will use the corporation's assets to pay the purchase price or otherwise wrongfully take the corporation's assets.
Corporations can employ defensive tactics to fend off a takeover. They can find a more compatible buyer (a "white knight"); issue additional shares to make the takeover less attractive (a "lock-up"); create new classes of stock whose rights increase if any person obtains more than a prescribed percentage (a "poison pill"); or boost share prices to make the takeover price less appealing.
Dissolution A corporation can terminate its legal existence by engaging in the dissolution process. Most statutes allow corporations to dissolve before they begin to operate as well as after they get started. The normal process requires the directors to adopt a resolution for dissolution, and the shareholders to approve it, by either a simple majority or, in some states, a two-thirds majority. After approval, the corporation engages in a "winding-up" period, during which it fulfills its obligations for taxes and debts, before making final, liquidation distributions to shareholders.
Derivative Suits Shareholders can bring suit on behalf of a corporation to enforce a right or to remedy a wrong that has been done to the corporation. Shareholders "derive" their right to bring suit from a corporation's right. One common claim in a derivative suit would allege misappropriation of corporate assets or other breaches of duty by the directors or officers. Shareholders most often bring derivative suits in federal courts.
Shareholders must maneuver through several procedural hoops before actually filing suit. Many statutes require them to put up security, often in the form of a bond, for the corporation's expenses and attorneys' fees from the suit, to be paid if the suit fails; this requirement often kills a suit before it even begins. The shareholders must have held stock at the time of the contested action and must have owned it continuously ever since. The shareholders first must demand that the directors enforce the right or remedy the wrong; if they fail to make a demand, they must offer sufficient proof of the futility of such a demand. Normally, a committee formed by the directors handles—and dismisses—the demand, and informed decisions are protected by the business judgment rule.
Proxy Contests A proxy contest is a struggle for control of a public corporation. In a typical proxy contest, a nonmanagement group vies with management to gain enough proxy votes to elect a majority of the board and to gain control of the corporation. A proxy contest may be a part of a takeover attempt.
Management holds most of the cards in such disputes: It has the current list of shareholders; shareholders normally are biased in its favor; and the nonmanagement group must finance its part of the proxy contest, but if management acts in good faith, it can use corporate money for its solicitation of proxy votes. In proxy contests over large, publicly held corporations, federal regulations prohibit, among other things, false or misleading statements in solicitations for proxy votes.
Insider Trading Federal, and often state, laws prohibit a corporate insider from using nonpublic information to buy or sell stock. Most cases involving violations of these laws are brought before federal courts because the federal law governing this conduct is extensive. The federal law, which is essentially an antifraud statute, states that anyone who knowingly or recklessly misrepresents, omits, or fails to correct a material or important fact that causes reliance in a sale or purchase, is liable to the buyer or seller. Those with inside information must either disclose the information or abstain from buying or selling.
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