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

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 TERMINATION OF A FRANCHISE Termination must follow the terms and conditions set forth in the franchise agreement. Termination must follow the terms and conditions set forth in the franchise 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 TERMINATION OF A SOLE PROPRIETORSHIP Relatively simple and straightforward. Relatively simple and straightforward. Owner pays the debts and keeps any remaining assets. 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. Alternative may be for owner sell the business but must specify how liabilities will be handled.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 TERMINATION OF A PARTNERSHIP UNDER UPA TERMINATION OF A PARTNERSHIP UNDER UPA Partnership ends while business continues, dissolution occurred. Partnership ends while business continues, dissolution occurred. Partnership and business enterprise both end, dissolution and winding up occur. Partnership and business enterprise both end, dissolution and winding up occur.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 DISSOLUTION OF A PARTNERSHIP Dissolution means that anytime a partner leaves the business, partnership is dissolved. Dissolution means that anytime a partner 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 terminate the business. Remaining partners may continue or terminate the business. Depends on method and manner of dissolution. Depends on method and manner of dissolution.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 Without Violation of the Agreement. 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. DISSOLUTION OF A PARTNERSHIP

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 In Violation of the Agreement. In Violation of the Agreement. – Each partner has legal power to withdraw at any time, but may not have the right to do so. – Partner’s 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. DISSOLUTION OF A PARTNERSHIP

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 By Operation of Law. By Operation of Law. – 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. DISSOLUTION OF A PARTNERSHIP

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 By Court Order based on the following grounds: 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. DISSOLUTION OF A PARTNERSHIP

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 CONTINUATION OF THE PARTNERSHIP BUSINESS Remaining partners have right to continue partnership if: 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 CONTINUATION OF THE PARTNERSHIP BUSINESS Withdrawing Partners. 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. Entering Partners. – New partner is liable to preexisting creditors up to the partner’s capital contribution.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 WINDING UP THE PARTNERSHIP Winding up is termination of business. Winding up is termination of business. Marshal and liquidate assets of business and distribute proceeds of process to parties. Marshal and liquidate assets of business and distribute proceeds of process to parties. General Partnership proceeds are distributed in following order: General Partnership proceeds are distributed in following order: – Creditors. – Partners, acting as creditors. – Return of capital contribution to partners. – Distribution of profits.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 WINDING UP THE PARTNERSHIP Limited Partnership proceeds are distributed as follows: 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 CHANGES IN CORPORATE STRUCTURE Include: Include: – Dissolution. – Merger and consolidation. – Sale of substantially all of corporate assets. – Stock acquisition.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 LIQUIDATION OF THE CORPORATION Consists of winding up the affairs of a business to go out of business. Consists of winding up the affairs of a business to go out of business. When corporation liquidates, corporation: 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. A corporation can sue and be sued.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 DISSOLUTION OF THE CORPORATION Dissolution terminates a corporation as a legal entity, or justice person. Dissolution terminates a corporation as a legal entity, or justice person. Voluntary Dissolution. Voluntary Dissolution. – Incorporators decide to to end corporation’s existence. – Requires: Board action recommends dissolution. Board action recommends dissolution. Shareholder approval (usually two-thirds of outstanding shares). Shareholder approval (usually two-thirds of outstanding shares). Notice to creditors. Notice to creditors.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 DISSOLUTION OF THE CORPORATION Involuntary Dissolution. 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; The State; Shareholders; or Shareholders; or Creditors. Creditors.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 CORPORATE MERGER AND CONSOLIDATION Merger is a combination of two corporations whereby only one of corporations continues to exist. 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. Consolidation is a combination of two corporations whereby a new corporation is formed, replacing original corporations.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 CORPORATE MERGER AND CONSOLIDATION Rationales or Motivations for Merger: Rationales or Motivations for Merger: – Economies of Scale. – Knowledge. – Diversification. – Competition. – Other Rationales.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 CORPORATE MERGER AND CONSOLIDATION Procedure: Procedure: – Board of Directors adopts merger plan. – Shareholders approve the merger. Effect of Merger: Effect of Merger: – Acquired corporation ceases to exist. – Creditors of acquired corporation now are creditors of surviving corporation.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 CORPORATE MERGER AND CONSOLIDATION Appraisal Rights. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 CORPORATE MERGER AND CONSOLIDATION To qualify for Appraisal Rights a Shareholder must: 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 SALE OF SUBSTANTIALLY ALL THE ASSETS Instead of merger, a corporation may simply buy all, or substantially all, the assets of another firm. 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. 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. Shareholder approval becomes necessary only when fundamental change in the corporate structure occurs.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 STOCK ACQUISITION Instead of buying assets, corporation may buy shares of another corporation. 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. 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. Transactions that take form of sales of assets or stocks but nevertheless have effect of mergers are called de facto mergers.