CHAPTER 34 BUSINESS TERMINATIONS AND OTHER EXTRAORDINARY EVENTS DAVIDSON, KNOWLES & FORSYTHE...

CHAPTER 34 CHAPTER 34 BUSINESS TERMINATIONS AND BUSINESS TERMINATIONS AND

OTHER EXTRAORDINARY EVENTSOTHER EXTRAORDINARY EVENTS

CHAPTER 34 CHAPTER 34 BUSINESS TERMINATIONS AND BUSINESS TERMINATIONS AND

OTHER EXTRAORDINARY EVENTSOTHER EXTRAORDINARY EVENTS

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

TERMINATION OF A FRANCHISETERMINATION OF A FRANCHISE

Termination must follow the terms and Termination must follow the terms and conditions set forth in the franchise conditions set forth in the franchise agreement.agreement.

Value of goodwill may be an asset.Value of goodwill may be an asset.Customer lists may be a trade secret.Customer lists may be a trade secret.



TERMINATION OF A SOLE TERMINATION OF A SOLE PROPRIETORSHIPPROPRIETORSHIP

TERMINATION OF A SOLE TERMINATION OF A SOLE PROPRIETORSHIPPROPRIETORSHIP

Relatively simple and straightforward.Relatively simple and straightforward.Owner pays the debts and keeps any Owner pays the debts and keeps any

remaining assets.remaining assets.Alternative may be for owner sell the Alternative may be for owner sell the

business but must specify how liabilities business but must specify how liabilities will be handled.will be handled.



TERMINATION OF A PARTNERSHIP TERMINATION OF A PARTNERSHIP UNDER UPAUNDER UPA

TERMINATION OF A PARTNERSHIP TERMINATION OF A PARTNERSHIP UNDER UPAUNDER UPA

Partnership ends while business continues, Partnership ends while business continues, dissolution occurred.dissolution occurred.

Partnership and business enterprise both Partnership and business enterprise both end, dissolution and winding up occur.end, dissolution and winding up occur.



DISSOLUTION OF A DISSOLUTION OF A PARTNERSHIPPARTNERSHIP


Dissolution means that anytime a partner Dissolution means that anytime a partner leaves the business, partnership is dissolved.leaves the business, partnership is dissolved.

Does not mean business ceases to exist.Does not mean business ceases to exist.Remaining partners may continue or Remaining partners may continue or

terminate the business.terminate the business.Depends on method and manner of Depends on method and manner of

dissolution.dissolution.



Without Violation of the Agreement.Without Violation of the Agreement.– Agreement may specify a time period or Agreement may specify a time period or

particular purpose for dissolution.particular purpose for dissolution.– Partner may decide to quit unless agreement Partner may decide to quit unless agreement

denies.denies.– All partners may agree to dissolve partnership.All partners may agree to dissolve partnership.– If any partner is expelled from the partnership If any partner is expelled from the partnership

by other partners, provided that expulsion by other partners, provided that expulsion permitted under the agreement.permitted under the agreement.





In Violation of the Agreement.In Violation of the Agreement.– Each partner has legal power to withdraw at any Each partner has legal power to withdraw at any

time, but may not have the right to do so. time, but may not have the right to do so. – Partner’s wrongful withdrawal causes dissolution, Partner’s wrongful withdrawal causes dissolution,

although remaining partners may unanimously although remaining partners may unanimously agree to continue the business and not wind up.agree to continue the business and not wind up.

– Partner who withdrew in violation of agreement Partner who withdrew in violation of agreement has no right to demand/require winding up.has no right to demand/require winding up.

– Does not have right to demand business be Does not have right to demand business be continued.continued.





By Operation of Law.By Operation of Law.– Partnership is dissolved by law if:Partnership is dissolved by law if:

It becomes unlawful to operate business.It becomes unlawful to operate business. Partner dies.Partner dies. Partner or partnership becomes bankrupt.Partner or partnership becomes bankrupt.





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






CONTINUATION OF THE CONTINUATION OF THE PARTNERSHIP BUSINESSPARTNERSHIP BUSINESSCONTINUATION OF THE CONTINUATION OF THE PARTNERSHIP BUSINESSPARTNERSHIP BUSINESS

Remaining partners have right to continue Remaining partners have right to continue partnership if:partnership if:– Withdrawing partner withdrew in violation of Withdrawing partner withdrew in violation of

agreement.agreement.– Withdrawing partner consents to continuation.Withdrawing partner consents to continuation.– Agreement permits a continuation after Agreement permits a continuation after




CONTINUATION OF THE CONTINUATION OF THE PARTNERSHIP BUSINESSPARTNERSHIP BUSINESSCONTINUATION OF THE CONTINUATION OF THE PARTNERSHIP BUSINESSPARTNERSHIP BUSINESS

Withdrawing Partners.Withdrawing Partners.– Must be indemnified and bought out.Must be indemnified and bought out.– Liable for debts owed during membership.Liable for debts owed during membership.– If withdrawal was in violation of agreement, If withdrawal was in violation of agreement,

partnership may deduct damages.partnership may deduct damages.– May elect how payment will be made.May elect how payment will be made.

Entering Partners.Entering Partners.– New partner is liable to preexisting creditors up New partner is liable to preexisting creditors up

to the partner’s capital contribution.to the partner’s capital contribution.



WINDING UP THE PARTNERSHIPWINDING UP THE PARTNERSHIPWINDING UP THE PARTNERSHIPWINDING UP THE PARTNERSHIP

Winding up is termination of business.Winding up is termination of business. Marshal and liquidate assets of business and Marshal and liquidate assets of business and

distribute proceeds of process to parties.distribute proceeds of process to parties. General Partnership proceeds are distributed in General Partnership proceeds are distributed in

following order:following order:– Creditors.Creditors.– Partners, acting as creditors.Partners, acting as creditors.– Return of capital contribution to partners.Return of capital contribution to partners.– Distribution of profits.Distribution of profits.



WINDING UP THE PARTNERSHIPWINDING UP THE PARTNERSHIPWINDING UP THE PARTNERSHIPWINDING UP THE PARTNERSHIP

Limited Partnership proceeds are Limited Partnership proceeds are distributed as follows:distributed as follows:– Claims of non-partner and partner creditors.Claims of non-partner and partner creditors.– Amounts owed to former partners prior to their Amounts owed to former partners prior to their

withdrawal.withdrawal.– Return of capital contributions of all partners.Return of capital contributions of all partners.– Remainder distributed as profits to all of Remainder distributed as profits to all of

parties.parties.



CHANGES IN CORPORATE CHANGES IN CORPORATE STRUCTURESTRUCTURE

CHANGES IN CORPORATE CHANGES IN CORPORATE STRUCTURESTRUCTURE

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



LIQUIDATION OF THE LIQUIDATION OF THE CORPORATIONCORPORATION

LIQUIDATION OF THE LIQUIDATION OF THE CORPORATIONCORPORATION

Consists of winding up the affairs of a Consists of winding up the affairs of a business to go out of business.business to go out of business.

When corporation liquidates, corporation:When corporation liquidates, corporation:– Sells its assets.Sells its assets.– Pays off in full its creditors.Pays off in full its creditors.– Remaining proceeds are distributed to Remaining proceeds are distributed to

shareholders in accordance with their rights and shareholders in accordance with their rights and preferences.preferences.

A corporation can sue and be sued.A corporation can sue and be sued.



DISSOLUTION OF THE DISSOLUTION OF THE CORPORATIONCORPORATION


Dissolution terminates a corporation as a Dissolution terminates a corporation as a legal entity, or justice person.legal entity, or justice person.

Voluntary Dissolution.Voluntary Dissolution.– Incorporators decide to to end corporation’s Incorporators decide to to end corporation’s

existence.existence.– Requires:Requires:

Board action recommends dissolution.Board action recommends dissolution. Shareholder approval (usually two-thirds of Shareholder approval (usually two-thirds of

outstanding shares).outstanding shares). Notice to creditors.Notice to creditors.





Involuntary Dissolution.Involuntary Dissolution.– Common reasons for involuntary dissolution by Common reasons for involuntary dissolution by

corporation because of wrongdoing or corporation because of wrongdoing or prejudice to shareholders and creditors.prejudice to shareholders and creditors.

– Corporation not asking for dissolution.Corporation not asking for dissolution.– Dissolution may occur at the request of:Dissolution may occur at the request of:

The State; The State; Shareholders; orShareholders; or Creditors.Creditors.



CORPORATE MERGER AND CORPORATE MERGER AND CONSOLIDATIONCONSOLIDATION


Merger is a combination of two Merger is a combination of two corporations whereby only one of corporations whereby only one of corporations continues to exist.corporations continues to exist.– Surviving corporation is the new entity and Surviving corporation is the new entity and

acquired firm no longer exists.acquired firm no longer exists.

Consolidation is a combination of two Consolidation is a combination of two corporations whereby a new corporation is corporations whereby a new corporation is formed, replacing original corporations.formed, replacing original corporations.





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




Procedure:Procedure:– Board of Directors adopts merger plan.Board of Directors adopts merger plan.– Shareholders approve the merger.Shareholders approve the merger.

Effect of Merger:Effect of Merger:– Acquired corporation ceases to exist.Acquired corporation ceases to exist.– Creditors of acquired corporation now are Creditors of acquired corporation now are

creditors of surviving corporation.creditors of surviving corporation.





Appraisal Rights.Appraisal Rights.– Shareholder who objects to merger may be Shareholder who objects to merger may be

entitled to appraisal rights.entitled to appraisal rights.– Allow dissenters to sell their shares back to the Allow dissenters to sell their shares back to the

corporation.corporation.– Dissenter can avoid becoming a shareholder in Dissenter can avoid becoming a shareholder in

survivor corporation and protect original survivor corporation and protect original investment.investment.




To qualify for Appraisal Rights a To qualify for Appraisal Rights a Shareholder must: Shareholder must: – Send written notice. Send written notice. – Make written demand for fair value of shares.Make written demand for fair value of shares.– Corporation must make written offer to Corporation must make written offer to

purchase shares.purchase shares.– Corporation and dissenting shareholder Corporation and dissenting shareholder

disagree about fair value, either party may disagree about fair value, either party may petition a court to determine fair value.petition a court to determine fair value.



SALE OF SUBSTANTIALLY ALL SALE OF SUBSTANTIALLY ALL THE ASSETSTHE ASSETS

SALE OF SUBSTANTIALLY ALL SALE OF SUBSTANTIALLY ALL THE ASSETSTHE ASSETS

Instead of merger, a corporation may Instead of merger, a corporation may simply buy all, or substantially all, the simply buy all, or substantially all, the assets of another firm.assets of another firm.

Such a sale may still require shareholder Such a sale may still require shareholder approval by the acquired firm.approval by the acquired firm.

Shareholder approval becomes necessary Shareholder approval becomes necessary only when fundamental change in the only when fundamental change in the corporate structure occurs.corporate structure occurs.



STOCK ACQUISITIONSTOCK ACQUISITIONSTOCK ACQUISITIONSTOCK ACQUISITIONInstead of buying assets, corporation may Instead of buying assets, corporation may

buy shares of another corporation.buy shares of another corporation.Board of directors need not approve this Board of directors need not approve this

transaction because corporation may transaction because corporation may purchase stock directly from individual purchase stock directly from individual shareholders.shareholders.

Transactions that take form of sales of Transactions that take form of sales of assets or stocks but nevertheless have effect assets or stocks but nevertheless have effect of mergers are called de facto mergers.of mergers are called de facto mergers.

CHAPTER 34 BUSINESS TERMINATIONS AND OTHER EXTRAORDINARY EVENTS DAVIDSON, KNOWLES & FORSYTHE...

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