Exit remedies for minority shareholders in close companies (IVOR nr. 82) 2011/3.3.4.2.2:3.3.4.2.2 Disposition of assets if no significant business is lefi

Exit remedies for minority shareholders in close companies (IVOR nr. 82) 2011/3.3.4.2.2

3.3.4.2.2 Disposition of assets if no significant business is lefi

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In the RMBCA 2005, the term "Disposition of Assets" has replaced "Sales of Assets" and when shareholder approval is required for a disposition of assets and when the board can decide by itself has been further clarified by means of 3 approaches: listing four situations in black and white when shareholder approval is not required; adopting a new standard for dispositions which require shareholder approval; and providing a safe harbour rule. In the following part, we will examine the three issues consecutively.

A. No approval by shareholders

In the RMBCA, shareholders are entitled to appraisal rights if they are entitled to vote on the disposition. So the key question regarding the availability of the rights is which disposition requires voting by the shareholders and which does not.

In the following four situations, subject to the articles of incorporation, no approval by the shareholders is required: 1

(1)

for the disposition of assets in the usual and regular course of business, regardless of the size of the transaction;2

(2)

to mortgage, pledge, dedicate to the repayment of indebtedness (with or without recourse), or otherwise encumber any or all of the corporation's assets, whether or not in the usual and regular course of business;

(3)

to transfer any or all of the corporation's assets to one or more corporations or other entities all of whose shares or interests are owned by the corporation; or

(4)

to distribute assets pro rata to the holders of one or more classes or series of the corporation's shares.

B. Shareholder approval required

The new standard applied in Section 12.02(a) of the RMBCA for shareholder approval is whether the transaction "leaves the corporation without a significant continuing business". It differs from the previous standard embodied in the Model Act, namely, "sales of all or substantially all" of a corporation's assets, but it comes into conformity with the wording and approach in section 7.21(c) of the ALI Principles. The previous standard "sales of all or substantially all" of a corporation's assets is a quantitative test. In contrast, the new standard is of a qualitative nature and focuses more on whether any significant business is lelt after the transaction than on what percentage of the business has been sold. Though the wording used in most corporate statutes is still "sales of all or substantially all" of a corporation's assets,3 and in practice, courts still give weight to the percentage test, they attach more importance to the qualitative standard embodied in the ALI and which has now also been adopted in the RMBCA.4

The previous and the new standard in the RMBCA emphasize different points of view. Both of them, however, require judicial discretion in application. Useful guidance on how to determine whether the business left is significant or not can be drawn from the case law and commentaries in the ALI:

1.

Purpose of the transaction. As understood, it is important to assess whether the assets being sold are quantitatively vital to the operation of the company and whether the sale sub stantially affects the existence of the company, but it is even more important to consider whether the sale is out of the ordinary line.5 Asset sales in the ordinary course of business and in liquidation are exempted from this section.6

2.

The characteristics of the industry and the special situations within the company, for example the result can be different from that in the real estate industry and retail industry.

3.

Whether the senior executives remain the same after the transaction.7

4.

It is also suggested that when determining whether significant business is left, active business operated by subsidiaries should also be considered.8

Such a situation is subject to great judicial discretion and subject to specific instances as mentioned in point 2. For example, if the corporation has only one significant business activity conducted by its wholly or nearly wholly owned subsidiary, qualified sales will need the approval of shareholders of the parent company.9 If the parent corporation has significant and directly managed business activities, and the subsidiary or subsidiaries have them as well, the court will have the power to decide that approval by the parent corporation is not required.10

C. The safe harbour rule

In most jurisdictions across the USA, courts' definitions of substantial assets range from 26 per cent to 75 per cent in an assets sale.11 This may be empirical support for this new safe harbour rule in Section 12.02 of the RMBCA, which provides that shareholder approval is not required for a transaction in which the corporation will retain a business activity that represented at least (i) 25 per cent of the total assets at the end of the most recently completed fiscal year, or (ii) 25 per cent of either income from continuing operations before taxes or revenues from continuing operation for that fiscal year. In each case, the corporation will conclusively be deemed to have retained a significant continuing business activity. The addition of a bright-line safe-harbour test provides more legal certainty and is highly desirable.

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