Written by attorneys · grounded in primary & secondary sources — see below
A statutory rule requiring shareholder approval for a corporation's sale, lease, exchange, or other disposition of assets when the transaction would leave the corporation without a significant continuing business activity. A corporation is conclusively deemed to retain a significant continuing business activity if it keeps a business activity representing at least twenty-five percent of total assets and twenty-five percent of income or revenues on a consolidated basis.
Sources & Authorities
How it applies
Common Examples
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Asset Sale Without Shareholder Vote
Silverline Industries agrees to sell its primary manufacturing division and customer contracts to a competitor. After the sale Silverline would retain only a small research unit representing twenty percent of consolidated assets. The board submits the deal to shareholders but fails to obtain the required approval at a meeting with a proper quorum. The transaction cannot proceed without the shareholder vote mandated for dispositions leaving the corporation without a significant continuing business activity.
Retained Division Meets Safe Harbor
Apex Manufacturing plans to sell two of its three operating divisions to a buyer. Post-sale Apex will retain its original packaging division representing twenty-eight percent of consolidated assets and twenty-six percent of revenues. The board approves the sale without submitting it to shareholders. Because the retained activity satisfies the twenty-five percent thresholds the disposition needs no shareholder vote.
Select any source to read its text and confirm it supports the definition.
Uniform Acts
Model Codes
Restatements
Hornbooks
Internal Transfer to Subsidiary
Horizon Group transfers substantially all of its real-estate holdings to a newly formed wholly owned subsidiary. The parent continues its manufacturing and sales operations unchanged. No shareholder meeting is called. The statute expressly exempts such internal transfers from the shareholder-approval requirement.
Sale Leaves Minimal Retained Activity
Pioneer Electronics agrees to sell its consumer-products division. After closing Pioneer will keep only a licensing unit representing eighteen percent of consolidated assets and twelve percent of revenues. The board seeks but does not obtain shareholder approval. The transaction is invalid for lack of the required vote.
Lease of Core Production Assets
Metro Steel leases its primary rolling mill and related equipment to an unaffiliated operator for a twenty-year term. Post-lease Metro retains only administrative offices and a small research staff representing twenty-two percent of assets. Shareholders reject the lease at the required meeting. The lease cannot proceed without approval.
Exchange of Operating Divisions
Summit Energy exchanges its natural-gas pipeline network for a minority interest in a competitor's wind-farm portfolio. After the exchange Summit retains only its coal-generation business representing twenty-four percent of consolidated assets. The board submits the exchange for shareholder vote. Approval is required because the retained activity falls below the safe-harbor thresholds.
Common questions
Frequently Asked
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When does a corporation's asset disposition require shareholder approval under Section 12.02?+
Shareholder approval is required when the disposition would leave the corporation without a significant continuing business activity. The statute provides a conclusive safe harbor if the retained activity represents at least twenty-five percent of consolidated total assets and twenty-five percent of income or revenues.
Supporting sources
What voting procedures apply to a Section 12.02 disposition?+
The board must first adopt a resolution authorizing the disposition. Shareholders then vote at a meeting where a quorum consists of a majority of the votes entitled to be cast on the matter. Approval requires a majority of the votes actually cast unless the articles or board impose a higher threshold.
Supporting sources
Does an internal transfer to a wholly owned subsidiary trigger Section 12.02 approval?+
No. The statute expressly permits a corporation to transfer assets to one or more wholly owned subsidiaries without shareholder approval. The exemption facilitates routine internal reorganizations and does not require shareholder consent for the internal step alone.
Supporting sources
426 U.S. 438, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976)Business Associations
…for civil liability is entitled to consideration. Cf. Northern Indiana Public Service Co. v. Izaac Walton League , 423 U. S. 12, 15 (1975); Udall v. Tollman , 380 U. S. 1, 16-17 (1965). The standard we adopt is supported by the SEC. Brief for the Securities and Exchange Commission as Amicus Curiae 13. [^maj-10]:…