Mergers, Consolidations, and Dissolutions

Merger

A merger occurs when one corporation absorbs another. The acquiring corporation continues to exist, but the target corporation ceases to exist. The acquiring corporation acquires all the assets and liabilities of the target corporation. Corporate mergers must conform to jurisdictional laws and usually must be approved by the majority of shareholders of both corporations.

Consolidation

Consolidation occurs when two or more corporations are dissolved, and a new corporation is created. The new corporation owns all the assets and liabilities of the former corporations. Like mergers, consolidations must typically be approved by the majority of shareholders of all corporations involved. If approved, articles of consolidation must be filed in the jurisdictions where the corporations existed.

Voluntary Dissolution

To dissolve a corporation voluntarily, the corporation must file a statement of intent to dissolve. At that point, the corporation must cease all business operations except those necessary to wind up its business affairs. The corporation must give notice to all known creditors of its dissolution. If the corporation fails to give notice, then the directors become personally responsible for any debt and legal liability. The corporation is required to pay off all debts before distributing any remaining assets to shareholders. Until the jurisdiction issues the articles of dissolution, the statement of intent may be revoked if shareholders change their mind.

Involuntary Dissolution

The jurisdiction of incorporation has the power to create corporations through granting corporate charters. Similarly, federal and provincial authorities have the right to revoke corporate charters. Shareholders may also request dissolution when:

• The shareholders are deadlocked and cannot elect a board of directors;
• When there is illegal, fraudulent or oppressive conduct by the directors or officers;
• When majority shareholders breach their fiduciary duty to the minority shareholders;
• Corporate assets are being wasted or looted; or
• The corporation is unable to carry out its purpose.

Finally, dissolution may occur as a result of bankruptcy or when the corporation is unable to cover its debts to creditors.

Concluding Thoughts

Articles of incorporation represent a corporate charter—that is, a contract between the corporation and the federal or provincial governments. Filing these articles, or “chartering,” is accomplished at either the federal or provincial level. In selecting a jurisdiction in which to incorporate, a corporation looks for a favorable corporate climate that meets their desired objectives. Most closely held companies choose to incorporate in their home province.

The hallmark of the corporate form of business enterprise is limited liability for its owners. Other features of corporations are separation of ownership and management, perpetual existence, and easy transferability of share interests. The corporation, as a legal entity, has many of the usual rights accorded natural persons. The principle of limited liability is broad but not absolute: when the corporation is used to commit a fraud or an injustice or when the corporation does not act as if it were one, the courts will ‘pierce the corporate veil’ and assign liability to shareholders.

Because ownership and control are separated in the modern publicly held corporation, shareholders generally do not make business decisions. Shareholders who own voting stock do retain the power to elect directors, amend the bylaws, ratify or reject certain corporate actions, and vote on certain extraordinary matters, such as whether to amend the articles of incorporation, merge, or liquidate.

Directors have the ultimate authority to run the corporation and are fiduciaries of the firm. In large corporations, directors delegate day-to-day management to salaried officers, whom they may fire. The full board of directors may, by majority, vote to delegate its authority to committees.

The general rule is to maximize shareholder value, but over time, corporations have been permitted to consider other factors in decision making. For example, allowing the board to consider factors other than maximizing shareholder value. Corporate social responsibility has increased, as firms consider things such as environmental impact and consumer perception in making decisions. Special business forms such as benefit corporations allow even greater flexibility in meeting social responsibility.

Depending on the purpose of a business and its goals, different business entities may fit the needs of owners better than others. It is important when starting a business to decide how to minimize tax and liability exposure in order to achieve the organization’s objectives. Because there is no perfect “fit” for every business need, understanding the advantages and disadvantages of the various business structures is important.