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Introduction to Disposing of All Corporation's Assets in U.S.A

2024-08-13
A corporation's disposing of all (or “substantially all") of its assets, “not in the ordinary course of business," is a fundamental change. Differently, it is not a fundamental change for the company buying the assets. Thus, the shareholders of the buying corporation do not get to vote on the transaction, and do not have rights of appraisal. This article will provide a brief overview of disposing of U.S. corporate assets.

  1. “Disposition” of Assets

    Each person who fulfills the conditions for "disposal" of an asset shall agree to the sale of the asset. Most states agree that leasing or exchanging the assets for other property is a “disposition”. On the other hand, mortgaging or pledging the assets (for a loan, for instance) is not a “disposition”.

  2. “All or Substantially All” of the Company's Assets

    The statutes historically have required approval for disposition of “all or substantially all” of the company's assets. The MBCA (2016) requires approval “if the disposition would leave the corporation without a significant continuing business activity.” It then creates a conclusive presumption that the company retains a significant continuing business activity if it retains at least 25% of its total assets after the transaction. Thus, as a rule of thumb, it is a fundamental corporate change if the company is disposing of 75% or more of its assets.

  3. Asset Disposed “Not in the Ordinary Course of Business”

    The disposition of assets is only a fundamental change if it is “not in the ordinary course of business," or, in the words of MBCA (2016) if the disposition is not “in the usual and regular course of business," Some corporations are in the business of selling their assets. For example, a company that buys and sells real estate may routinely sell its current assets. But most businesses do not do this, and it will generally be obvious when a disposition of assets is not in the ordinary course.

  4. Why Would a Corporation Want to Dispose All (Or “Substantially All") of Its Assets?

    Often, it will sell off its assets before undergoing a voluntary dissolution and going out of business. In the voluntary dissolution, it will (after paying creditors) distribute the proceeds of the sale of assets to its shareholders. Thus, sometimes this course is the first step in ending the company’s existence. Or, as another possibility, the business may sell its assets to raise cash, which it can then use to expand and grow.

  5. Successor Liability in the Disposition of Assets

    (1)
    		 Difference in successor liability from the merger

    In the disposition of assets, we do not expect successor liability. Unlike mergers, which will feature successor liability. In the merger, at least one business entity ceases to exist. Thus, we must have successor liability: the surviving company must succeed to the rights and liabilities of the entities that disappear; those rights and liabilities must be vested somewhere, and the original holder of those rights and liabilities no longer exists.

    In the disposition of assets, however, no entity disappears. The company that disposed of its assets still exists (and, indeed, now should have considerable cash, because it just sold its assets). Because the company disposing of its assets still exists, a creditor of the selling corporation can sue it. And if the selling corporation dissolves, it will be required to discharge its liabilities before distributing assets to shareholders. Accordingly, as a general rule, successor liability is not expected in a sale of assets.
    (2)
    		 Exceptions to this general rule of successor liability

    (a) One, obviously, is when the disposition of assets provides otherwise. Thus, the company buying assets may agree in the sale to assume liabilities of the selling company. (Presumably, doing so will permit the buyer to buy the assets for a lower price.)

    (b) Another exception is the “mere continuation" doctrine. Under this, if the corporation buying assets is a mere continuation of the selling company, the court will apply successor liability. For instance, if the buying company has the same management and engaged in the same business as the selling company, a court may equate the two corporations and find the buyer to have assumed the seller's obligations.

    (c) Finally, another exception is the “de facto merger” doctrine by which a court concludes that what was consummated as a sale of assets was “really” a merger. It reviewed the case law on “mere continuation" and “de facto merger" and reached an interesting conclusion: no case had ever imposed successor liability in a sale of assets if the sale was for adequate consideration. Stated another way courts will impose successor liability in a sale of assets only if the sale was for inadequate capital.

Reference:
[1] Richard D. Freer. The law of corporations in a nutshell. West Pub. Co, 2020.

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