CHAPTER 34 BUSINESS TERMINATIONS AND OTHER EXTRAORDINARY EVENTS

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CHAPTER 34 BUSINESS TERMINATIONS AND OTHER
EXTRAORDINARY EVENTS
DAVIDSON, KNOWLES FORSYTHE Business Law Cases
and Principles in the Legal Environment (8th Ed.)
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TERMINATION OF A FRANCHISE

• Termination must follow the terms and conditions
  set forth in the franchise agreement.
• Value of goodwill may be an asset.
• Customer lists may be a trade secret.

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TERMINATION OF A SOLE PROPRIETORSHIP

• Relatively simple and straightforward.
• Owner pays the debts and keeps any remaining
  assets.
• Alternative may be for owner sell the business
  but must specify how liabilities will be handled.

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TERMINATION OF A PARTNERSHIP UNDER UPA

• Partnership ends while business continues,
  dissolution occurred.
• Partnership and business enterprise both end,
  dissolution and winding up occur.

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DISSOLUTION OF A PARTNERSHIP

• Dissolution means that anytime a partner leaves
  the business, partnership is dissolved.
• Does not mean business ceases to exist.
• Remaining partners may continue or terminate the
  business.
• Depends on method and manner of dissolution.

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DISSOLUTION OF A PARTNERSHIP

• Without Violation of the Agreement.
• Agreement may specify a time period or particular
  purpose for dissolution.
• Partner may decide to quit unless agreement
  denies.
• All partners may agree to dissolve partnership.
• If any partner is expelled from the partnership
  by other partners, provided that expulsion
  permitted under the agreement.

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DISSOLUTION OF A PARTNERSHIP

• In Violation of the Agreement.
• Each partner has legal power to withdraw at any
  time, but may not have the right to do so.
• Partners wrongful withdrawal causes dissolution,
  although remaining partners may unanimously agree
  to continue the business and not wind up.
• Partner who withdrew in violation of agreement
  has no right to demand/require winding up.
• Does not have right to demand business be
  continued.

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DISSOLUTION OF A PARTNERSHIP

• By Operation of Law.
• Partnership is dissolved by law if
• It becomes unlawful to operate business.
• Partner dies.
• Partner or partnership becomes bankrupt.

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DISSOLUTION OF A PARTNERSHIP

• By Court Order based on the following grounds
• Partner becomes insane.
• Partner becomes incapacitated.
• Partner commits serious misconduct.
• Partner repeatedly breaches agreement.
• Business can no longer be operated profitably.
• Other circumstances court believes justifies
  dissolution.

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CONTINUATION OF THE PARTNERSHIP BUSINESS

• Remaining partners have right to continue
  partnership if
• Withdrawing partner withdrew in violation of
  agreement.
• Withdrawing partner consents to continuation.
• Agreement permits a continuation after
  dissolution.

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CONTINUATION OF THE PARTNERSHIP BUSINESS

• Withdrawing Partners.
• Must be indemnified and bought out.
• Liable for debts owed during membership.
• If withdrawal was in violation of agreement,
  partnership may deduct damages.
• May elect how payment will be made.
• Entering Partners.
• New partner is liable to preexisting creditors up
  to the partners capital contribution.

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WINDING UP THE PARTNERSHIP

• Winding up is termination of business.
• Marshal and liquidate assets of business and
  distribute proceeds of process to parties.
• General Partnership proceeds are distributed in
  following order
• Creditors.
• Partners, acting as creditors.
• Return of capital contribution to partners.
• Distribution of profits.

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WINDING UP THE PARTNERSHIP

• Limited Partnership proceeds are distributed as
  follows
• Claims of non-partner and partner creditors.
• Amounts owed to former partners prior to their
  withdrawal.
• Return of capital contributions of all partners.
• Remainder distributed as profits to all of
  parties.

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CHANGES IN CORPORATE STRUCTURE

• Include
• Dissolution.
• Merger and consolidation.
• Sale of substantially all of corporate assets.
• Stock acquisition.

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LIQUIDATION OF THE CORPORATION

• Consists of winding up the affairs of a business
  to go out of business.
• When corporation liquidates, corporation
• Sells its assets.
• Pays off in full its creditors.
• Remaining proceeds are distributed to
  shareholders in accordance with their rights and
  preferences.
• A corporation can sue and be sued.

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DISSOLUTION OF THE CORPORATION

• Dissolution terminates a corporation as a legal
  entity, or justice person.
• Voluntary Dissolution.
• Incorporators decide to to end corporations
  existence.
• Requires
• Board action recommends dissolution.
• Shareholder approval (usually two-thirds of
  outstanding shares).
• Notice to creditors.

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DISSOLUTION OF THE CORPORATION

• Involuntary Dissolution.
• Common reasons for involuntary dissolution by
  corporation because of wrongdoing or prejudice to
  shareholders and creditors.
• Corporation not asking for dissolution.
• Dissolution may occur at the request of
• The State
• Shareholders or
• Creditors.

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CORPORATE MERGER AND CONSOLIDATION

• Merger is a combination of two corporations
  whereby only one of corporations continues to
  exist.
• Surviving corporation is the new entity and
  acquired firm no longer exists.
• Consolidation is a combination of two
  corporations whereby a new corporation is formed,
  replacing original corporations.

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CORPORATE MERGER AND CONSOLIDATION

• Rationales or Motivations for Merger
• Economies of Scale.
• Knowledge.
• Diversification.
• Competition.
• Other Rationales.

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CORPORATE MERGER AND CONSOLIDATION

• Procedure
• Board of Directors adopts merger plan.
• Shareholders approve the merger.
• Effect of Merger
• Acquired corporation ceases to exist.
• Creditors of acquired corporation now are
  creditors of surviving corporation.

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CORPORATE MERGER AND CONSOLIDATION

• Appraisal Rights.
• Shareholder who objects to merger may be entitled
  to appraisal rights.
• Allow dissenters to sell their shares back to the
  corporation.
• Dissenter can avoid becoming a shareholder in
  survivor corporation and protect original
  investment.

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CORPORATE MERGER AND CONSOLIDATION

• To qualify for Appraisal Rights a Shareholder
  must
• Send written notice.
• Make written demand for fair value of shares.
• Corporation must make written offer to purchase
  shares.
• Corporation and dissenting shareholder disagree
  about fair value, either party may petition a
  court to determine fair value.

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SALE OF SUBSTANTIALLY ALL THE ASSETS

• Instead of merger, a corporation may simply buy
  all, or substantially all, the assets of another
  firm.
• Such a sale may still require shareholder
  approval by the acquired firm.
• Shareholder approval becomes necessary only when
  fundamental change in the corporate structure
  occurs.

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STOCK ACQUISITION

• Instead of buying assets, corporation may buy
  shares of another corporation.
• Board of directors need not approve this
  transaction because corporation may purchase
  stock directly from individual shareholders.
• Transactions that take form of sales of assets or
  stocks but nevertheless have effect of mergers
  are called de facto mergers.