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Types and Procedures of Fundamental Changes of a U.S. Company

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Types and Procedures of Fundamental Changes of a U.S. Company

At a certain stage in the lifespan of a company, the owners may seek to implement fundamental changes to the organization. While certain alterations may involve primarily administrative adjustments, such as changing the company's name, others may necessitate restructuring the company's framework. These changes can potentially jeopardize the rights of creditors and minority shareholders, thereby warranting specific statutory oversight and regulation. This article will give you a brief overview of the types of fundamental corporate changes and the steps involved.

  1. Types of Fundamental Corporate Changes

    In contrast to typical management decisions, fundamental changes generally necessitate approval not only from the board of directors but also from shareholders. These changes, referred to as "fundamental corporate changes," may be defined as modifications to a corporation bylaw. In many states, events classified as fundamental changes include:

    (1)
    Amendment of the articles of incorporation
    (2)
    Merging into another corporation
    (3)
    Acquisition of all of a company's stock in a “share exchange"
    (4)
    Sale of substantially all of the corporation's business assets
    (5)
    Conversion to another form of business
    (6)
    Dissolution.

    In addition to the aforementioned instances, we may add to this list involuntary dissolution, which is a fundamental change, but is the result of action not by the board and shareholders, but by a court or government official. It is imperative to note that regulations pertaining to fundamental changes exhibit notable discrepancies across different states, underscoring the necessity to diligently refer to the relevant statutory provisions.

  2. Procedure for Fundamental Changes

    In general, each fundamental corporate change except the involuntary dissolution is accomplished through a five-step process.

    (1)
    The board of directors’ approval

    In a few states, shareholders have the power to initiate amendment of the articles, but as a general rule there can be no fundamental change without the board's initiating it.

    (2)
    Shareholders’ approval

    The board must inform the shareholders that it recommends the fundamental change and seek shareholder approval.

    (3)
    The board calls a special meeting of shareholders

    The board should convene a special meeting of shareholders to consider the change. If the shareholders approve, the change will be implemented. If they reject it, the fundamental change will not occur. In certain states like Ohio, all shareholders must be notified of the special meeting regarding a fundamental change, even those without voting rights. In most states, however, only shareholders with voting privileges receive the notice.

    (4)
    Additional right of shareholders who opposed the change

    If the change is approved by shareholders, the corporation will proceed with the change. However, shareholders who disagreed with the change may have the option of exercising their " ‘dissenting shareholders’ right of appraisal," which enables them to compel the corporation to purchase their shares.

    (5)
    Deliver documents to state officer

    Fifth, in most fundamental changes, the corporation must inform the state by delivering a document summarizing the change, which is filed by the appropriate state officer, usually the secretary of state.

  3. Approaches of the meeting of shareholders to approve the "fundamental change"

    Assuming that there is a quorum at the meeting of shareholders, the shareholders will vote on whether to approve the fundamental change. On this issue, there are three approaches: the traditional, the majority, and the modern.

    (1)
    The traditional approach

    Under the traditional approach, the change must be approved by two-thirds of the shares entitled to vote. This requirement is extraordinary because it requires a super majority (two-thirds), and it is a super majority of the shares entitled to vote (and not simply of the shares present at the meeting). Though the trend has been away from this super majority requirement, several states, including Texas, adhere to it.

    For example, X Corp. has 6,000 shares entitled to vote on a fundamental change. Suppose 4,500 shares attend the meeting (that gives us a quorum). At least 4,000 of those must vote "yes" to approve the proposal. Because we need two-thirds of the 6,000 entitled to vote, not two-thirds of the 4,500 shares that are present at the meeting. Thus, if 3,800 shares attended the meeting, the deal could not be approved, because it would be impossible to get the “yes” votes of 4,000 shares.

    (2)
    The majority approach

    Under what appears to be the majority approach, the fundamental change must be approved by a majority of the shares entitled to vote. This is the approach in Delaware. Note that the majority must be of the shares that are entitled to vote, and not simply of those present or that actually do vote.

    For example, X Corp. has 6,000 shares entitled to vote. At the meeting, 3,200 shares attend (so we have a quorum). At least 3,001 must vote “yes” to approve the fundamental change.

    (3)
    The modern approach

    The modern approach is the most liberal and is embraced by the MBCA (2016). (In fact, this view may have become the majority view in recent years.) It requires approval by only a majority of the shares actually voting on the fundamental change.

    For example, X Corp. has 6,000 shares entitled to vote. At the meeting, 3,200 shares attend (so we have a quorum), but only 2,800 shares actually vote on whether the fundamental change should be approved. All that is required under this view is for 1,401 shares to vote “yes”.

See also:
Introduction to Shareholder's Appraisal Rights in U.S. Fundamental Corporate Change

Reference:
[1] Richard D. Freer. The law of corporations in a nutshell. West Pub. Co, 2020.

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