§ 5: Liability of Shareholders

• Shareholders are generally not liable for the contracts or torts of the corporation.

• If the corporation fails, shareholders cannot lose more than their investment, except when:

  • A shareholder hasn’t paid for stock pursuant to the subscription agreement.

  • Shareholder buys “watered stock” which is below the stock’s par value.

Stock Subscription Agreements

• Subscriptions are written irrevocable contracts to purchase capital stock of a corporation prior to incorporation. Failure to sell or buy shares is a breach of contract.

• Par-value shares: corporation must have a value equal to the total value of the shares.

• Watered stock: worth less than FMV of stock. Shareholder is personally liable for difference.

Duties of Majority Shareholders

• Majority shareholders own enough shares to exercise de facto (actual) control over the corporation.

• Majority shareholders owe a fiduciary duty to corporation and the minority shareholders and creditors when they sell their shares because of the possibility of transfer of control.

Merger, Consolidation and Transformation.

§1: Merger and Consolidation

• Corporations can grow and expand by:

  • Mergers.

  • Consolidation.

  • Purchase of another corporation’s assets.

  • Purchases of a controlling interest in another corporation.

Merger

• Merger is the legal combination of two or more corporations after which only one corporation remains. A’s articles of incorporation are amended to include articles of merger.

• After merger, A continues as the surviving corporation with all of B’s rights and obligations.

A+B=A

Consolidation

• A and B combine such that both cease to exist and a new corporation C emerges which has all the rights and obligations previously held by A and B.

• The articles of consolidation for C take the place of the original articles of A and B.

A+B=C

Merger and Consolidation Procedures

PBoard of Directors of each corporation involved must approve the merger plan.

P Next shareholders of each corporation must approve.

• Then, articles filed with Secretary of State who issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation.

• When allowed by state statute, a shareholder has the right to dissent and be “bought out” of his/her shares (shareholder’s appraisal right).

• In cases of: merger, consolidation, sale of most of corporation’s assets not in the ordinary course of business, adverse amendments to the articles of incorporation.

• Certain procedures must be followed.

Short-Form Mergers

• For “Parent-Subsidiary” Merger.

• No approval of shareholders needed.

• Parent must own at least 90% of each class of stock of the subsidiary corporation.

• Board of parent corporation approves.

• New articles filed.

• Copy of merger sent to each shareholder of subsidiary corporation.

Appraisal Rights

• Dissenting shareholder gives written notice of dissent prior to vote on proposed transaction. The notice shows what dissenters stock will cost corporation if action takes place.

• If approved, shareholder must make a demand for payment of shares at fair market value (calculated on day prior to the date on which the vote was taken -- or court will determine).

• Corporation must:

  • Make written offer to purchase a dissenting shareholder’s stock, accompanied by current balance sheet and income statement for the corporation.

  • States differ as to whether dissenting shareholder loses his status as a shareholder during appraisal process.