Does a corporation have any inherent legal right to life? Sorry for the boring thread title, but stay with me, this is a legitimate question that may even have an answer.
Suppose a group of shareholders own control of a corporation. Suppose further that these shareholders have a financial problem of their own that is unrelated to the corporation.
The corporation is profitable and the remaining minority shareholders want to continue with their investment. But the majority group decides to liquidate the corporation, simply because they personally need the money.
Now I’m sure that the majority shareholders have a right to sell their shares, but do they have a right to sell the corporate assets, i.e. liquidate the corporation?
Each corporation is slightly different, but the Board of Directors (elected by the shareholders) can generally do whatever the hell it wants, as long as there are enough votes.
The short answer is yes, at least in freely traded corporations.
The corporation’s only goal is to make money for its shareholders. (In fact, in most states, it’s illegal for the corporation to have any other purpose.) Now, it’s OK for the corp. to go about this by building community good will by giving to charity or by developing a harmonious relationship with labor by not sticking them when contract negotiations come around, but everything a corporation does must be at least theoretically attached to this goal. If the shareholders vote to liquidate the corporation, their word is law. (The Board itself is elected by the shareholders, but there are certain very large-scale decisions that even the Board can’t make, such as liquidation – that typically must be approved by the Board and then ratified by a shareholder vote before it can take place.)
In smaller, closely-held corporations, where shareholders are typically officers are typically all or most of the employees (like a three-man handyman firm, or a medical practice) there are laws in place that protect a minority shareholder from being squeezed out of both his investment and his livliehood at the same time, but this doesn’t typically apply with corporations in which shareholders are in it for investment purposes.
Thanks friedo and Cliffy. And Cliffy, I understood your comments even if the ‘short answer’ was inverted, so it’s OK.
The corporation in question is a C-Corp that is, itself, a non-wholly-owned subsidiary of a larger publicly traded C-Corp.
The board of directors is voting strictly according to personal interest (the parent company needs money). Votes tend to go 3-2. (The three votes belong to the parent company, the two votes to the minority shareholders.)
Anyway, I’m not trying to get free legal advice, I’m just trying to get advice of any kind, anywhere and everywhere. We have our own attorney, hired by the corporation, but he seems less than sure about any of this.
Do you (the minority shareholders) have an attorney, or does the attorney you describe represent the subsidiary corporation? If the latter, you don’t have an attorney. In fact, if the attorney tries to represent both you and the subsidiary, it would be a conflict of interest.
If you don’t have an attorney, get one. Make sure he knows corporate law in your state. There are some protections for minority shareholders that may apply.
I am a corporate lawyer in Illinois, and I am not aware of any such law–I would be most interested to read about this. If you have contractual rights under an employment agreement, that is another story, but if you are an “at-will” employee you can be fired at any time for any non-discriminatory reason, including in connection with the elimination of share ownership (employment rights are different in the UK).
A corporation exists under state law, its charter (Articles) and bylaws. In Illinois, the business corporation act requires the consent of at least 66.66% of the shareholders (not just a director vote) for an asset sale and for dissolution of the company. (The Articles and Bylaws may increase the percentage required.) A shareholder who disagrees with a proposed sale of assets, merger or dissolution may “dissent” and obtain instead “fair value” (as ultimately determined by a court) for his shares, but generally cannot stop the transaction if the shareholder vote is obtained (with proper notices of the meetings and proper procedures, etc.). This right to dissent (also sometimes called an appraisal right), along with the obligations of loyalty and care imposed on directors, are a minority owner’s guarantee that the majority cannot treat the minority unfairly with regards to price–but it does not enable a minority owner to stop a transaction.
There is indeed dispute over whether a majority owner owes any other obligations to a minority owner, but this issue arises mostly in the context of a partial buyout of a minority’s interest–where the entire corporation is being sold and the majority is getting the same compensation on a pro rata basis as the minority, the general concensus is that the minority does not have any additional rights.
So, be sure the majority is not getting extra compensation (in the form of post-closing management or employment contracts or non-compete payments or options), make sure they follow all procedures properly and, most important, listen to your lawyer, not me. And what Random said about making sure you have a lawyer–the company’s lawyer is not your lawyer.
New York corporate lawyer here. Humble Servant has covered all of the bases in his reply; just be aware that the voting percentage required for sale of assets and dissolution varies widely by jurisdiction. Many larger corporations are organized under Delaware law, which requires only a simple majority of the directors, followed by a simple majority of the outstanding shares entitled to vote.
I believe Cliffy was referring to special provisions that may arise under statutes governing “professional corporations,” which are peculiar animals created for certain licensed professions (medicine, architecture, law, etc.). I’m not very familiar with them.
If the company’s lawyer is as uncertain about all this as you’ve described, then not only make sure you have separate counsel, but make sure that your counsel’s competent and is willing to do some of the work that the company really should be doing. It may mean more expense for you, but I’ve dealt with nitwit company counsel before and the damage they can do just through there own ignorance can be substantial.
My father had all his assets in a revocable living trust (a separate entity). After he died, the trusteeship passed to me. I had sole legal authority to invest, dispose, pay bills, etc. for the trust, and once I was satisfied that I had taken care of all the post-death details, I distributed the remaining assets of the trust among the designated family members and dissolved the trust.
The other family members might have had a claim that I was abusing my authority as Trustee in the way I handled things, but according to my (the trust’s) lawyer, they couldn’t claim that I didn’t have the RIGHT to do it – only an obligation to do it properly.
