Corporate Structural Changes

A corporation can undergo substantial changes in the course of its operations. Fundamental changes in the structure of a corporation can affect the financial makeup of the company. Such changes can also have a substantial affect on the rights and duties of creditors and minority shareholders. Accordingly, any such changes must comply with corporate, tax, and securities laws.

In the event that a corporation does undergo substantial changes, it may be required to amend its articles of incorporation. For example, a corporation may amend its articles of incorporation to change the company’s name. Additionally, a corporation may be required to amend its articles of incorporation to change the financial and control structure within the corporation. Finally, a corporation may amend its articles of incorporation to enforce corporate reorganization. California corporations have broad power to amend their articles of incorporation as often as they choose, subject to very few limitations outlined in California Corporations Code § 900(a). However, courts may intervene when the majority shareholders within a corporation attempt to amend the articles of incorporation if such an amendment would negatively impact the minority shareholders. Furthermore, not all changes require an amendment to the articles of incorporation. A corporation may enforce some changes by amending the bylaws or by acquiring unanimous written consent from shareholders.

A corporation also undergoes substantial changes when it participates in mergers or acquisitions. In such an event, a corporation must note tax and securities law requirements. A corporation may acquire another corporation in three ways—through a stock purchase, an asset purchase, or a merger. A stock purchase takes place when one corporation, the parent corporation, acquires another corporation, the subsidiary, by purchasing the subsidiary’s corporate stocks. In an asset purchase, a corporation acquires another corporation’s business and assets while maintaining ownership of the corporate shares. In this case, the selling corporation’s shareholders must approve the sale for the sale to take effect. Lastly, a merger takes place when one corporation is absorbed into another and the surviving corporation receives all the disappearing corporation’s business, assets, and liabilities. A merger constitutes a corporate reorganization, which is subject to corporate, tax, and securities law considerations.

A corporation must also consider the applicable corporate laws in the event of a corporate dissolution. A corporation may dissolve simply because its articles of incorporation indicate an expiration term. However, a corporation may also cease to exist by virtue of a merger or an acquisition. Finally, a corporation’s shareholders may initiate voluntary dissolution proceedings or a court may initiate involuntary dissolution proceedings—both of which will liquidate a corporation’s business affairs. A proper understanding of the applicable laws will help a corporation’s shareholders and managers maintain their rights and responsibilities in the event that a corporation does undergo such structural changes.