CHAPTER 20 Corporations

© 2005 West Legal Studies in Business

A Division of Thomson Learning

CHAPTER 20CHAPTER 20

CorporationsCorporations

2© 2005 West Legal Studies in Business


• What are the express and implied powers of What are the express and implied powers of corporations? On what sources are these powers corporations? On what sources are these powers based?based?

• What are the duties of corporate directors and What are the duties of corporate directors and officers? officers?

• What must directors do to avoid liability for honest What must directors do to avoid liability for honest mistakes of judgment and poor business decisions?mistakes of judgment and poor business decisions?

• What role do corporate shareholders play in the What role do corporate shareholders play in the corporate enterprise? What are some of the corporate enterprise? What are some of the important rights of shareholders?important rights of shareholders?

• What is the difference between a corporate merger What is the difference between a corporate merger and a corporate consolidation? What steps are and a corporate consolidation? What steps are involved in the termination of a corporate involved in the termination of a corporate enterprise?enterprise?

Learning ObjectivesLearning Objectives



• A corporation is a creature of A corporation is a creature of statute, an artificial “person.”statute, an artificial “person.”– Most states follow the Model Business Most states follow the Model Business

Corporation Act (MBCA) or the RMBCA, Corporation Act (MBCA) or the RMBCA, that are model corporation laws. that are model corporation laws.

• The shares (stock) of a corporation The shares (stock) of a corporation are owned by at least one are owned by at least one shareholder (stockholder). shareholder (stockholder).

The Nature of the The Nature of the CorporationCorporation



• A corporation is an artificial “person” A corporation is an artificial “person” and has constitutional rights to:and has constitutional rights to:– Equal protection; Equal protection; – Access to the courts, can sue and be Access to the courts, can sue and be

sued;sued;– Right to due process before denial of Right to due process before denial of

life, liability or property.life, liability or property.

Constitutional Rights of Constitutional Rights of CorporationsCorporations



Constitutional Rights of Constitutional Rights of CorporationsCorporations• Corporation’s rights (Corporation’s rights (cont’dcont’d):):

– Freedom from unreasonable search and Freedom from unreasonable search and seizure and double jeopardy.seizure and double jeopardy.

– Freedom of speech.Freedom of speech.• Only officers and directors have protection Only officers and directors have protection

against self-incrimination. against self-incrimination. – However, corporations do not have full However, corporations do not have full

protection of privileges and immunities protection of privileges and immunities clause.clause.



Limited Liability of Limited Liability of ShareholdersShareholders• The corporation provides limited The corporation provides limited

liability for stockholders. liability for stockholders. • In certain situations, the In certain situations, the

corporate “veil” of limited corporate “veil” of limited liability can be pierced, holding liability can be pierced, holding the shareholders personally the shareholders personally liable. liable.



Corporate TaxationCorporate Taxation• Corporate profits can either be kept as Corporate profits can either be kept as

retained earningsretained earnings or passed on to the or passed on to the shareholders as shareholders as dividendsdividends..

• Corporate profits are taxed under Corporate profits are taxed under federal and state law as a separate federal and state law as a separate “person” from its shareholders.“person” from its shareholders.

• Regular “C” corporations are taxed Regular “C” corporations are taxed twice: at the corporate level and at twice: at the corporate level and at the shareholder level.the shareholder level.



Torts and Criminal ActsTorts and Criminal Acts

• A corporation is liable for the torts A corporation is liable for the torts committed by its agents or officers committed by its agents or officers within the course and scope of their within the course and scope of their employment under the doctrine of employment under the doctrine of respondeat superiorrespondeat superior..

• Corporation can be liable for criminal Corporation can be liable for criminal acts, but only fined. Responsible acts, but only fined. Responsible officers may go to prison. officers may go to prison.



• A corporation may act and enter into contracts A corporation may act and enter into contracts as any natural person, except as as any natural person, except as limited bylimited by::– U.S. Constitution.U.S. Constitution.– State constitutions.State constitutions.– State statutes.State statutes.– Its own articles of incorporation.Its own articles of incorporation.– Its own corporate bylaws.Its own corporate bylaws.– Resolutions by its own board.Resolutions by its own board.

Corporate PowersCorporate Powers



Express Corporate Express Corporate PowersPowers

• The express powers of a corporation The express powers of a corporation are found in the corporation’s are found in the corporation’s articles of incorporation, the laws of articles of incorporation, the laws of the state of incorporation, and in the the state of incorporation, and in the state and federal corporations.state and federal corporations.

• Corporate by-laws may also grant or Corporate by-laws may also grant or limit a corporation’s express powers. limit a corporation’s express powers.



Implied PowersImplied Powers

• Corporation has implied powers to: to Corporation has implied powers to: to perform all acts reasonably necessary perform all acts reasonably necessary to accomplish its corporate purposes, to accomplish its corporate purposes, e.g.,:e.g.,:

• Borrow and lend money.Borrow and lend money.• Extend credit.Extend credit.• Make charitable contributions.Make charitable contributions.

– A corporate officer can bind corporation in A corporate officer can bind corporation in contract in matters connected with the contract in matters connected with the ordinary business affairs of the enterprise.ordinary business affairs of the enterprise.



Classification of Classification of CorporationsCorporations• DomesticDomestic corporation does corporation does

business in its state of business in its state of incorporation.incorporation.

• ForeignForeign corporation from X state corporation from X state doing business in Z state. doing business in Z state.

• AlienAlien Corporation: formed in Corporation: formed in another country doing business in another country doing business in United States.United States.



Classification of Classification of CorporationsCorporations

• Public and Private.Public and Private.• Nonprofit.Nonprofit.• Close Corporations.Close Corporations.

– Shares held by few shareholders.Shares held by few shareholders.– More informal management,similar to More informal management,similar to

a partnership.a partnership.– Restriction on transfer of shares.Restriction on transfer of shares.



Classification of Classification of CorporationsCorporations• ““S Corporations”: S Corporations”: Avoids the federal Avoids the federal

“double taxation” of regular corporations “double taxation” of regular corporations at the corporate level. Only dividends are at the corporate level. Only dividends are taxed to the shareholders as personal taxed to the shareholders as personal income. IRS requirements:income. IRS requirements:– Corporation is domestic, fewer than 75 Corporation is domestic, fewer than 75

shareholders, only one class of stock, no shareholders, only one class of stock, no shareholder can be a non-resident alien.shareholder can be a non-resident alien.

• Professional Corporations.Professional Corporations.



Corporate FormationCorporate Formation• The process of incorporation The process of incorporation

generally involves two steps:generally involves two steps:– Preliminary and Promotional Preliminary and Promotional

Activities; andActivities; and– The Legal Process of Incorporation. The Legal Process of Incorporation.



Promotional ActivitiesPromotional Activities

• PromotersPromoters are the persons who take are the persons who take the preliminary steps of organizing the the preliminary steps of organizing the venture and attracting venture and attracting subscriberssubscribers (investors) via (investors) via subscriptionsubscription agreements. agreements.

• A Promoter (or corporation) can create A Promoter (or corporation) can create a a prospectusprospectus required by federal and required by federal and state securities laws to inform and state securities laws to inform and protect investors.protect investors.



Promoter’s LiabilitiesPromoter’s Liabilities

• Promoter is personally liable for pre-Promoter is personally liable for pre-incorporation contracts on behalf of incorporation contracts on behalf of the corporation, unless 3the corporation, unless 3rdrd party party agrees to hold future corporation agrees to hold future corporation liable. liable.

• After corporate formation, corporation After corporate formation, corporation can adopt the pre-incorporation can adopt the pre-incorporation contract and release the promoter by contract and release the promoter by creating a “novation”creating a “novation”..



Incorporation ProceduresIncorporation Procedures

Promotion

Name Search

File Articles of Incorporation

Subscribers

1st Organiza-tional Meeting

State Charter



Incorporation ProceduresIncorporation Procedures• State Chartering: Select state (some State Chartering: Select state (some

states such as Delaware cater to states such as Delaware cater to corporations).corporations).

• Articles of Incorporation: primary Articles of Incorporation: primary enabling document filed with the enabling document filed with the Secretary of State that includes basic Secretary of State that includes basic information about the corporation. information about the corporation. Person(s) who execute the articles are Person(s) who execute the articles are the incorporators. the incorporators.



Incorporation ProceduresIncorporation Procedures• Choose and reserve a Corporate Choose and reserve a Corporate

Name.Name.• Name must have the proper suffix: Name must have the proper suffix:

“corporation,” “corp.,” “Incorporated.” “corporation,” “corp.,” “Incorporated.”

• You should also consider registering You should also consider registering the corporation as a “dot com” at the corporation as a “dot com” at networksolutions.comnetworksolutions.com or or register.com.register.com.

http://www.networksolutions.com/

http://www.simplenet.com/



• Purpose: trend towards “any legal Purpose: trend towards “any legal business.”business.”

• Duration: usually perpetual.Duration: usually perpetual.• Capital Structure: Most states requires Capital Structure: Most states requires

some minimal capitalization (Texas some minimal capitalization (Texas requires $1,000), plus number and requires $1,000), plus number and class(es) of shares authorized and class(es) of shares authorized and “par value” of shares at incorporation.“par value” of shares at incorporation.




• Internal Organization: usually Internal Organization: usually included in the bylaws.included in the bylaws.

• Registered Office and Agent: specific Registered Office and Agent: specific person that will receive any legal person that will receive any legal notice and documents from state notice and documents from state and/or 3and/or 3rdrd parties. parties.

• Incorporators (usually the promoter): Incorporators (usually the promoter): at least one with name and address.at least one with name and address.




First Organizational First Organizational MeetingMeeting• After the corporation is “chartered” After the corporation is “chartered”

(created) it and can do business.(created) it and can do business.• Shareholders should have the first Shareholders should have the first

organizational meeting to: approve organizational meeting to: approve the bylaws, elect directors, hire the bylaws, elect directors, hire officers and adopt pre-incorporation officers and adopt pre-incorporation contracts and activities.contracts and activities.



Corporate Management-Corporate Management-Directors and OfficersDirectors and Officers• Every corporation is governed by a board Every corporation is governed by a board

of directors. of directors. • Individual directors are not agents of Individual directors are not agents of

corporation, only the board itself can act corporation, only the board itself can act as a “super-agent” and bind the as a “super-agent” and bind the corporation.corporation.

• A director can also be a shareholder, A director can also be a shareholder, especially in closely-held corporations.especially in closely-held corporations.



Election of DirectorsElection of Directors• Subject to statutory limitations, the Subject to statutory limitations, the

number of directors is set forth in the number of directors is set forth in the articles of incorporation:articles of incorporation:– Directors appointed at the first organizational Directors appointed at the first organizational

meeting.meeting.– In closely held companies, directors are In closely held companies, directors are

generally the incorporators and/or the generally the incorporators and/or the shareholders.shareholders.

– Term of office is generally for one year.Term of office is generally for one year.– Director can be removed Director can be removed for cause for cause (for failing (for failing

to perform a required duty).to perform a required duty).



Board of Directors Board of Directors MeetingsMeetings

• Directors hold meetings pursuant to Directors hold meetings pursuant to bylaws with recorded minutes. bylaws with recorded minutes.

• Special meetings may be called with Special meetings may be called with sufficient notice.sufficient notice.

• Meetings require QUORUM (minimum Meetings require QUORUM (minimum number of directors to conduct official number of directors to conduct official corporate business, usually majority).corporate business, usually majority).

• Each director generally has one vote.Each director generally has one vote.



Role of Corporate Role of Corporate Officers Officers and Executivesand Executives• Officers serve at the pleasure of the Officers serve at the pleasure of the

Board of Directors but have fiduciary Board of Directors but have fiduciary duties to company as well.duties to company as well.

• Their employment relationships are Their employment relationships are generally governed by contract law generally governed by contract law and employment law.and employment law.

• Officers may be terminated for Officers may be terminated for cause.cause.



Duties and Liabilities Duties and Liabilities of Directors and Officersof Directors and Officers

• Directors and officers are fiduciaries of Directors and officers are fiduciaries of the corporation. They owe ethical and the corporation. They owe ethical and legal duties to the corporation and legal duties to the corporation and shareholders:shareholders:

• Duty of Care Duty of Care : Directors/officers are : Directors/officers are expected to act in good faith and the best expected to act in good faith and the best interests of the corporation. Failure to interests of the corporation. Failure to exercise due care may subject individual exercise due care may subject individual directors or officers personally liable.directors or officers personally liable.



• Duty of CareDuty of Care ( (cont’dcont’d):):– Make informed and Make informed and

reasonable decisions; reasonable decisions; – Rely on competent Rely on competent

consultants and experts; andconsultants and experts; and– Exercise reasonable Exercise reasonable

supervision.supervision.




• A A dissentingdissenting director is rarely held director is rarely held liable for mismanagement of liable for mismanagement of corporation. Dissent must be corporation. Dissent must be registered with the corporate registered with the corporate secretary and posted in the minutes secretary and posted in the minutes of the meetings.of the meetings.




• Duty of LoyaltyDuty of Loyalty: subordination of personal : subordination of personal interests to the welfare of the corporation.interests to the welfare of the corporation.– No competition with Corporation.No competition with Corporation.– No “corporate opportunity.”No “corporate opportunity.”– No conflict of interests.No conflict of interests.– No insider trading.No insider trading.– No transaction that is detrimental to No transaction that is detrimental to

minority shareholders. minority shareholders. • In re Cumberland Farms, Inc. (2002). In re Cumberland Farms, Inc. (2002).




Conflicts of InterestConflicts of Interest

• Full disclosure of any potential Full disclosure of any potential conflicts of interest and abstain conflicts of interest and abstain from voting on any transaction from voting on any transaction that may benefit the that may benefit the director/officer personally.director/officer personally.

• However, if transaction was fair However, if transaction was fair and reasonable, it will not be and reasonable, it will not be voidable if approved by majority of voidable if approved by majority of disinterested directors.disinterested directors.



Liability of Directors and Liability of Directors and OfficersOfficers• Directors and officers may be Directors and officers may be

liable for negligent acts that liable for negligent acts that breach the standard of due care:breach the standard of due care:– Crimes and torts committed by Crimes and torts committed by

individually and/or those individually and/or those committed by employees under committed by employees under their supervision.their supervision.

– Shareholder derivativeShareholder derivative suits where suits where shareholder(s) sue directors on shareholder(s) sue directors on behalf of corporation].behalf of corporation].



Business Judgment RuleBusiness Judgment Rule• Immunizes a director or officer from Immunizes a director or officer from

liability from consequences of a liability from consequences of a business decision that turned sour.business decision that turned sour.

• Court will not require directors or Court will not require directors or officers to manage “in hindsight.” officers to manage “in hindsight.”

• As long as decision was reasonable, As long as decision was reasonable, informed, made in good faith and in informed, made in good faith and in the best interests of the the best interests of the corporation, BJR will apply.corporation, BJR will apply.



Corporate Ownership--Corporate Ownership--ShareholdersShareholders• Ownership of shares grants a shareholder Ownership of shares grants a shareholder

an equitable ownership interest in a an equitable ownership interest in a corporation.corporation.

• Shareholders generally have no right to Shareholders generally have no right to manage the daily affairs of the corporation, manage the daily affairs of the corporation, but do so indirectly by electing directors.but do so indirectly by electing directors.

• Shareholders are generally protected from Shareholders are generally protected from personally liability by the corporate veil of personally liability by the corporate veil of limited liability.limited liability.



Shareholder PowersShareholder Powers• Shareholder powers include approving all Shareholder powers include approving all

fundamental changes to the corporation:fundamental changes to the corporation:– Amending articles of incorporation or Amending articles of incorporation or

bylaws.bylaws.– Approval of mergers or acquisition.Approval of mergers or acquisition.– Sale of all corporate assets or dissolution.Sale of all corporate assets or dissolution.

• Shareholders also elect and remove the Shareholders also elect and remove the board of directors.board of directors.



Shareholder MeetingsShareholder Meetings• Shareholders’ meetings must occur Shareholders’ meetings must occur

at least annually. Voting at least annually. Voting requirements and procedures are:requirements and procedures are:– Quorum of shareholders owning more Quorum of shareholders owning more

than 50% of shares must be present to than 50% of shares must be present to conduct business;conduct business;

– Shareholders may appoint a proxy or Shareholders may appoint a proxy or enter into a voting trust agreement.enter into a voting trust agreement.



Shareholder MeetingsShareholder Meetings• For special shareholder meetings:For special shareholder meetings:

– Notice and time of meetings must Notice and time of meetings must be sent in writing to each be sent in writing to each shareholder within a reasonable shareholder within a reasonable time ahead of the meeting.time ahead of the meeting.

– Notice must state reason for Notice must state reason for meeting and only deal with this meeting and only deal with this matter.matter.



Shareholder VotingShareholder Voting• Common shareholder entitled to one Common shareholder entitled to one

vote per share.vote per share.• Articles and by-laws can exclude or Articles and by-laws can exclude or

limit voting rights of certain classes of limit voting rights of certain classes of stock.stock.

• Quorum must be present -- Quorum must be present -- shareholders representing more than shareholders representing more than 50% of outstanding shares must be 50% of outstanding shares must be present. present.



Shareholder VotingShareholder Voting• Shareholders may vote on Shareholders may vote on

resolutions.resolutions.– Need majority present for most Need majority present for most

resolutions.resolutions.– Need a “super majority” (e.g., 67%) for Need a “super majority” (e.g., 67%) for

important matters: sale of assets, etc.. important matters: sale of assets, etc..• Voting lists by corporate secretary Voting lists by corporate secretary

contains record of stock ownership. contains record of stock ownership.



Shareholder VotingShareholder Voting• Methods of Increasing Minority Share-Methods of Increasing Minority Share-

holder Power Within the Corporation:holder Power Within the Corporation:– Cumulative Voting allows minority Cumulative Voting allows minority

shareholders to get a board member shareholders to get a board member elected.elected.• x # to be elected x shareholders # of x # to be elected x shareholders # of

shares = shareholder can cast them all for shares = shareholder can cast them all for one board nominee.one board nominee.

– Shareholder Voting Agreements.Shareholder Voting Agreements.– Voting Trusts.Voting Trusts.



• Shareholders have the right:Shareholders have the right:– To vote.To vote.– To have a stock certificate.To have a stock certificate.– To purchase newly issued stock.To purchase newly issued stock.– To dividends, when declared by board.To dividends, when declared by board.– To inspect corporate records.To inspect corporate records.– To transfer shares, with some exceptions.To transfer shares, with some exceptions.– To a proportionate share of corporate assets To a proportionate share of corporate assets

on dissolution.on dissolution.– To file suit on behalf of corporation.To file suit on behalf of corporation.

Shareholders’ RightsShareholders’ Rights



Preemptive RightsPreemptive Rights• Common law concept which is a Common law concept which is a

preference to existing preference to existing shareholders to purchase a pro-shareholders to purchase a pro-rated share of newly-issued stock rated share of newly-issued stock within a certain period of time.within a certain period of time.

• Provided for in the articles of Provided for in the articles of incorporation.incorporation.

• Significant in a close corporation to Significant in a close corporation to prevent dilution and loss of control.prevent dilution and loss of control.



DividendsDividends

• Distribution of corporate profits or income. Distribution of corporate profits or income. • Only as ordered by the Board.Only as ordered by the Board.• Can be stock, cash, property, stock of Can be stock, cash, property, stock of

other corporations.other corporations.• State laws control the sources of revenues State laws control the sources of revenues

for dividends, which may be paid from for dividends, which may be paid from retained earnings, net profits and surplus.retained earnings, net profits and surplus.



Directors’ Failure to Directors’ Failure to Declare a DividendDeclare a Dividend• When directors fail to declare a When directors fail to declare a

dividend, shareholders can sue.dividend, shareholders can sue.• Directors do not have to declare if Directors do not have to declare if

they have a rational basis for they have a rational basis for withholding a dividend (a bona fide withholding a dividend (a bona fide purpose).purpose).

• Often, profits are retained for Often, profits are retained for expansion, research or upgrades.expansion, research or upgrades.



Liability of ShareholdersLiability of Shareholders• Shareholders are generally not liable Shareholders are generally not liable

for the contracts or torts of the for the contracts or torts of the corporation.corporation.

• If the corporation fails, shareholders If the corporation fails, shareholders cannot lose more than their cannot lose more than their investment, except when: investment, except when: – A shareholder hasn’t paid for stock A shareholder hasn’t paid for stock

pursuant to the subscription agreement.pursuant to the subscription agreement.– Shareholder buys “watered stock” which Shareholder buys “watered stock” which

is below the stock’s par value.is below the stock’s par value.



Duties of Majority Duties of Majority ShareholdersShareholders• Majority shareholders own enough Majority shareholders own enough

shares to exercise shares to exercise de factode facto (actual) (actual) control over the corporation.control over the corporation.

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

• Robbins v. Sanders (2004).Robbins v. Sanders (2004).



• Corporations can grow and expand Corporations can grow and expand by:by:– Mergers.Mergers.– Consolidation.Consolidation.– Purchase of another corporation’s Purchase of another corporation’s

assets.assets.– Purchases of a controlling interest in Purchases of a controlling interest in

another corporation.another corporation.

Merger and ConsolidationMerger and Consolidation



• Legal combination of Legal combination of two or more corporations two or more corporations (A & B) after which only A (A & B) after which only A corporation remains. A’s corporation remains. A’s articles of incorporation articles of incorporation are amended to include are amended to include articles of merger.articles of merger.• After merger, A After merger, A continues as the continues as the surviving corporation surviving corporation with all of B’s rights and with all of B’s rights and obligations.obligations.

AA BB

AA

MergerMerger



• Occurs when two or more Occurs when two or more corporations (A & B) corporations (A & B) combine such that both combine such that both cease to exist and a cease to exist and a newnew corporation emerges which corporation emerges which has all the rights and has all the rights and obligations previously held obligations previously held by A and B.by A and B.

• C’s articles of consolidation C’s articles of consolidation take the place of the take the place of the original articles of A and B.original articles of A and B.

AA BB

CC

ConsolidationConsolidation



• The acquiring corporation extends its The acquiring corporation extends its ownership and control over the physical ownership and control over the physical assets of another company.assets of another company.

• Acquiring corporation shareholders do not Acquiring corporation shareholders do not need to approve unless:need to approve unless:– Acquiring corporation is paying for assets with its Acquiring corporation is paying for assets with its

own stock and there is not enough stock authorized own stock and there is not enough stock authorized oror

– Acquiring corporation sells on a national exchange, Acquiring corporation sells on a national exchange, is paying with its own stock, and newly issued stock is paying with its own stock, and newly issued stock = 20% or more than the outstanding shares.= 20% or more than the outstanding shares.

Purchase of AssetsPurchase of Assets



Purchase of Assets: Purchase of Assets: LiabilitiesLiabilities

• Generally, an acquiring corporation is Generally, an acquiring corporation is not liable for liabilities of selling not liable for liabilities of selling corporation corporation unlessunless::– The acquiring corporation impliedly or expressly The acquiring corporation impliedly or expressly

assumes the liabilities.assumes the liabilities.– Sale amounts to what is really a merger or Sale amounts to what is really a merger or

consolidation.consolidation.– Purchaser continues the seller’s business and Purchaser continues the seller’s business and

retains the same personnel.retains the same personnel.– Sale is fraudulently executed to escape liability.Sale is fraudulently executed to escape liability.

• The selling corporation needs both The selling corporation needs both board and shareholder approval.board and shareholder approval.



Purchase of StockPurchase of Stock

• Alternative to merger or consolidation Alternative to merger or consolidation is the purchase of a controlling is the purchase of a controlling interest (e.g., 51%) of a “target” interest (e.g., 51%) of a “target” corporation’s stock (called a corporation’s stock (called a “takeover”) giving the purchaser “takeover”) giving the purchaser corporation controlling interest in the corporation controlling interest in the target.target.

• The aggressor deals entirely with the The aggressor deals entirely with the target’s shareholders.target’s shareholders.



• Tender Offers.Tender Offers.– A publicly advertised offer addressed A publicly advertised offer addressed

to all shareholders of the target is to all shareholders of the target is called a tender offer.called a tender offer.

– Tender offer is usually higher than Tender offer is usually higher than market value per share but market value per share but conditioned on the acquisition of a conditioned on the acquisition of a certain % of sharescertain % of shares• Can be in exchange for aggressor's stock.Can be in exchange for aggressor's stock.• Sec strictly regulates tender offers.Sec strictly regulates tender offers.

Purchase of Stock: Purchase of Stock: TenderTender



TerminationTermination

• Termination of a corporation, like a Termination of a corporation, like a partnership, consists of two phases:partnership, consists of two phases:– Dissolution (voluntary or involuntary); Dissolution (voluntary or involuntary); andand– Liquidation.Liquidation.

• Dissolution can brought about by:Dissolution can brought about by:– Act of legislature.Act of legislature.– Certificate expiration.Certificate expiration.– Voluntary approval by shareholders and Voluntary approval by shareholders and

board.board.– Unanimous action by all shareholders.Unanimous action by all shareholders.– Court order.Court order.



• Shareholders can initiate dissolution Shareholders can initiate dissolution by a unanimous vote to dissolve.by a unanimous vote to dissolve.

• Or, the Board can initiate by Or, the Board can initiate by submitting a proposal to the submitting a proposal to the shareholders for a vote at the annual shareholders for a vote at the annual shareholder meeting or specially-shareholder meeting or specially-called meeting.called meeting.– Colt v. Mt. Princeton Trout Club, Inc.Colt v. Mt. Princeton Trout Club, Inc.

(2003).(2003).

DissolutionDissolution



• Voluntary Dissolution.Voluntary Dissolution.– Board liquidates and acts as trustees of Board liquidates and acts as trustees of

assets.assets.– Court will appoint a receiver if:Court will appoint a receiver if:

• Board refuses; orBoard refuses; or• Creditors want a receiver. Creditors want a receiver.

• Involuntary Dissolution.Involuntary Dissolution.– Court appoints receiver.Court appoints receiver.

LiquidationLiquidation

Documents

CHAPTER 20 Corporations