Chapter 12
Fundamental Changes in Corporate Structure
Introduction
This chapter addresses the fundamental changes that will inevitably need to be made by a
corporation to accommodate its evolving needs. The following are considered fundamental
changes to a corporation and require approval by both corporate managers and owners:
amendment to articles of incorporation
merger
consolidation
sale, lease, or exchange of corporate assets not in the ordinary course of business
termination of a corporation
Lecture Notes
Fundamental Changes
Changes that significantly affect the basic foundation of the corporation are considered
“fundamental” to its existence and require special approval by both the managers (board
of directors) and owners (shareholders). The following are recognized as fundamental
changes:
amendment to articles of incorporation
merger
consolidation
sale, lease, exchange of corporate assets not in the
ordinary course of business
dissolution
 Standard Approval Procedure
Fundamental changes require a two-step approval process: (1) board of director approval
of the change and recommendation to the shareholders and (2) shareholder approval. This
two-step process protects the interests of the corporate owners by allowing them
participation in changes that will affect their investments.

Board of Directors’ Approval
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Before a fundamental change is recommended to the shareholders, the board of directors
considers whether the change is in best interests of shareholders. If the board of directors
approves the change, then it is submitted to the shareholders.

Shareholders’ Approval
Fundamental changes will affect shareholders’ investments and therefore must be
approved by a majority of the shareholders.
 Fundamental Changes
The following “changes” affect the fundamental nature of the corporation:

Amendment to Articles of Incorporation
Articles create and organize, therefore an amendment to the articles is a
fundamental change. For this reason, articles of incorporation should provide the
minimal statutory requirements.

Merger
One or more corporations (merged corporations) are absorbed into another
corporation (surviving corporation).

Consolidation
One or more corporations consolidate and form a new corporation.
Note: The Revised Model Business Corporate Act (RMBCA) does not recognize consolidations,
because no company remains to answer for the debts of the extinguished corporations.

Sale of Corporate Assets
Corporation buys all or substantially all of the assets of another corporation, not in
the ordinary course of business. This causes a fundamental change only in the
purchased corporation, not the acquiring corporation; therefore, only the board
and shareholders of the acquired corporation are required to approve the sale.

(Hostile Takeovers)
While a hostile takeover is a fundamental change to corporate structure, clearly
board of director and shareholder approval is not in issue—because the
corporation is being taken over by a hostile aggressor.

Dissolution of Corporation
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Two-step process
1. dissolve corporate form
2. liquidate corporate assets
Step One: Dissolution
The corporation must be dissolved to terminate the corporate existence.

Voluntary Dissolution
The corporate managers (board of directors) or owners (shareholders) may
voluntarily dissolve the corporation. This is fairly common when a
corporation is no longer a profitable business.

Involuntary
The corporation may be involuntarily dissolved by outsiders, generally
because of poor or ineffective management by the board.
1. By State
If the corporation fails to comply with statutory reporting
requirements (e.g., filing its annual report), the secretary of state
may involuntarily dissolve the corporation. It is surprising how
many corporations are administratively dissolved but continue in
business.
2. By Shareholders
Shareholders may seek to terminate the corporation when the
corporation is no longer profitable or if the board can no longer
effectively manage the corporation
Example: Green Valley, Inc., a logging company, is run by a board of directors
that is in constant conflict. Three of the board members support selective
harvesting, an expensive but environmentally friendly way of logging. The other
three board members prefer to clear-cut the land because it is fast and profitable.
The board cannot cooperatively work together, because they cannot agree on
appropriate logging techniques. After six-months of deadlock, the shareholders
request that the court involuntarily dissolve the corporation in order to allow the
shareholders to recoup their investment and re-invest their money in a profitable
business enterprise.
Step Two: Liquidation of Corporate Assets
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The corporation must turn its assets into cash (“liquid assets”) before the
corporate existence terminates. Once the corporate contracts are completed, its
assets are sold, and the accounts receivable are collected, the corporation profits
are distributed as follows:

Creditors’ Claims
Creditors are paid the amounts due before profits can be distributed to
shareholders.

Distributions to Shareholders
After corporate debts are paid, any remaining profits will be
distributed to shareholders as a “return on their investment,” if there is
any.
File Articles of Dissolution
A corporation is not legally dissolved until it notifies the secretary of state that it
has dissolved and liquidated its assets.
Note: As a practical matter, most corporations fail to complete this step. Rather,
the dissolved corporation fails to file its annual report with the secretary of state,
and therefore the secretary of state administratively dissolves the corporation.
Answers to Study Questions in Review
1. What are considered to be fundamental changes to the structure of a corporation?
Mergers, consolidations, sale or exchange of corporate property not in the ordinary
course of business, amendments to the articles of incorporation, and termination of the
corporation are all considered fundamental changes to a corporation.
2. Who must approve fundamental changes before they occur?
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Changes that significantly affect the basic foundation of the corporation, and are
therefore considered fundamental to its existence, require special approval by both the
corporate managers and owners.
3. What is the difference between a merger and a consolidation of two or more corporations?
The consolidation of two or more corporations is substantially the same as a merger;
however, unlike a merger, after corporations consolidate, the previous corporations are
extinguished and a new corporation is formed (e.g., A and B consolidate and form
corporation C).
4. What is a hostile takeover?
A hostile takeover is an attempt by one company to take over another company without
its consent by purchasing a majority of its stock, and thereby gaining control of the target
corporation.
5. Why would shareholders ask a court to dissolve their corporation?
Shareholders may ask a court to dissolve their corporation when it is not being effectively
managed—for example, if the directors are deadlocked on a vote.
6. What is the financial status of a corporation that is insolvent?
A corporation is insolvent if its debts exceed its assets.
7. What happens if a corporation is liquidated?
After a corporation is dissolved, its assets must be turned into cash (a liquid asset), its
creditors must be paid, and any money or assets of the corporation that remain may be
distributed to shareholders.
8. Are shareholders always entitled to receive corporate assets if their corporation is dissolved?
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No. Shareholders receive a share of the corporate assets only if the corporation
has first paid all of its creditors.
Answers to Case Studies in Review
1. Jim is a shareholder of Ducks Forever, Inc., a duck decoy manufacturer. Ducks Forever, Inc.,
wants to merge with Plastic Producers, Inc., a plastic manufacturer and begin to manufacture
plastic decoys rather than the wood decoys that they have traditionally made. Jim is upset at
the prospect of “cheapening” the products and objects to the merger. If the majority of the
shareholders of Ducks Forever, Inc., approve the merger, what right does Jim have as a
dissenter?
Shareholders such as Jim who object to fundamental changes in the corporation, such as
a merger, can force the corporation to buy their shares at a fair market price.
2. Sally and Joe are the sole shareholders of Right Track, Inc., a running-shoe manufacturer.
After 25 years in business together, Sally and Joe decide to dissolve the corporation and
retire. After liquidating their assets, the corporation distributed the remaining profits to each
of them; they each received $500,000.00. Two months after they liquidate, Polka-Dot
Leather, Inc., a leather manufacturer, sues Sally and Joe for $25,000.00 due on supplies
provided to Right Track, Inc., for the manufacture of their shoes. Sally and Joe did not notify
their creditors of their intent to dissolve the corporation; therefore, many of their creditors’
claims were not paid at the time of their liquidation. Are Sally and Joe liable for the
corporation’s debt even though they received the distribution from the corporation as
shareholders?
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Yes. Shareholders may only receive distributions of the corporate assets after the
corporation’s debts are paid (unless the shareholder also happens to be a creditor of the
corporation). Even if shareholders receive distributions, those distributions are subject to
later claims by creditors of the corporation who did not receive notice of the dissolution
or were otherwise unknown to the corporation.
Project Applications
Your law firm represents Dizknee, Inc., a California corporation specializing in the production of
children’s movies. Dizknee, Inc., wants to merge with Movie Fun, Inc., a small movie animation
company. Your supervising attorney asks you to research your state’s statutes regulating
corporate mergers to determine who must approve the merger before it occurs. Prepare a brief
memorandum to your attorney explaining the approval procedures required for a corporate
merger in your state.
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