Journal of the House of Representatives
of the Second Session of the 110th General Assembly
of the State of South Carolina
being the Regular Session Beginning Tuesday, January 11, 1994

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Since the members of the public benefit and religious corporations cannot receive anything from the merger and since the value of all the nonprofit corporation's assets must be transferred to another charity prior to the merger, the "merging-in" nonprofit corporation will merely be the corporate shell. It is likely that this will rarely, if ever, happen. However, it is noted that if the former nonprofit corporation had franchise rights, owned favorable leases, had long-term employees, had favorable insurance, or compen- sation ratings, that it might be desirable to actually merge the shell thereby transferring these operational rights into the business corporation (assuming, of course, that full value for these rights had previously been distributed by the acquiring corporation to another charity).

Assume this example. A hospital is operated at a particular location by a public benefit corporation. The hospital corporation has a very favorable lease which runs only to the corporation and cannot be sublet or assigned. The hospital wants to move to a different location. A for-profit corporation desires to obtain the old location for a store. If as part of the merger, the hospital receives full value for the value of the lease it would be profitable for the hospital to merge and be able to transfer the valuable lease to the business corporation. If merger were not allowed, the hospital could not transfer this valuable leasehold and thus would not get as much money when it moves to the new location. It is desirable to maximize the dollar value which is available for the charitable work, and the merger in this situation permits the hospital to realize more value.

Section 33-31-1102. Limitations on mergers by public benefit or religious corporations.

(a) Without the prior approval of the court of common pleas of Richland County in a proceeding in which the Attorney General has been given written notice, a public benefit or religious corporation may merge only with:

(1) a public benefit or religious corporation;

(2) a foreign corporation that would qualify under this chapter as a public benefit or religious corporation;

(3) a foreign or domestic business; mutual benefit corporation; or a corporation chartered directly by special act of the General Assembly, a city, county, or other governmental unit other than the Secretary of State, provided the public benefit or religious corporation is the surviving corporation and continues to be a public benefit or religious corporation after the merger; or,

(4) a foreign or domestic business or mutual benefit corporation, provided that:

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(i) on or before the effective date of the merger, assets with a value equal to the greater of the fair market value of the net tangible and intangible assets, including goodwill, of the public benefit corporation or religious corporation or the fair market value of the public benefit corporation or religious corporation if it were to be operated as a business concern are transferred or conveyed to one or more persons who would have received its assets under Section 33-31-1406(a)(5) and (6) had it dissolved;

(ii) it shall return, transfer, or convey any assets held by it upon condition requiring return, transfer, or conveyance, which condition occurs by reason of the merger, in accordance with such condition; and,

(iii) the merger is approved by a majority of directors of the public benefit or religious corporation who are not and will not become members or shareholder in or officers, employees, agents, or consultants of the surviving corporation.

(b) At least twenty days before consummation of a merger of a public benefit corporation or a religious corporation pursuant to subsection (a)(4), notice, including a copy of the proposed plan of merger, must be delivered to the Attorney General.

(c) No member of a public benefit or religious corporation may receive or keep anything as a result of a merger other than a membership or membership in the surviving public benefit or religious corporation.

(d) Where approval or consent is required by this section, it must be given if the transaction is consistent with the purposes of the public benefit or religious corporation or is otherwise in the public interest.
OFFICIAL COMMENT

The provisions of section 11.02 are designed to prevent the assets of public benefit or religious corporations from being diverted from their intended charitable or public purposes as a result of a merger. Consequently section 11.02 provides that public benefit and religious corporations can merge only under specified conditions with specified types of corporations without court approval in a proceeding in which the attorney general has been given written notice. In addition, members of public benefit and religious corporations may only receive or keep memberships in the surviving corporation unless they obtain court or attorney general approval.

If the requirements of section 11.02(a)(4) are met, a public benefit or religious corporation may merge with a business or mutual benefit corporation that is the surviving entity. However, those in control of the public benefit or religious corporation may not enter into a sweetheart merger in which they acquire the assets of the corporation for less than its

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fair market value. Two requirements of subsection (a)(4) address this problem. The first is that the fair market value of the public benefit or religious corporation must be established and paid for the assets of the corporation. Fair market value is defined as the greater of the value of the net tangible and intangible assets (including goodwill) of the public benefit corporation or its value if it were an ongoing business concern. These figures could be different. A public benefit or religious corporation might have a small net worth, but significant earning potential if it were operated as a business corporation. Consequently the ongoing concern value would be higher than the net asset value. To avoid any dispute, the Model Act requires that the higher "value" be paid for the corporation.

The second requirement deals with the fact that value is often subjective and difficult to determine. Subdivision (a)(4)(iii) requires that the merger must be approved by a majority of the public benefit or religious corporation's directors who will not be shareholders in or officers, employees, agents or consultants of the surviving corporation. This diminishes a possible conflict of interest with the attendant pressure on the directors to value the public benefit or religious corporation at less than its true fair market value.

Apart from the specific limitations of subdivision (a)(4), the directors and officers must meet their duties of care and loyalty under sections 8.30, 8.31 and 8.40. They must determine that the merger is in the best interest of the public benefit corporation. Moreover the directors and officers cannot engage in any side deals or receive any incentives to favor or not to object to the merger if the incentives violate their duty of loyalty.

Once the value of the public benefit or religious corporation has been determined, that value must be transferred to an appropriate entity. The distributee must be an entity or entities that would have received the assets under section 14.06(a)(5) and (6) had the corporation dissolved. See the Official Comment to Section 14.06. Any assets held upon condition requiring return, transfer or conveyance, which condition occurs by reason of the merger, must be returned in accordance with such condition. See section 14.06(a)(4) and Official Comment to Section 14.06.

A court in approving a merger may allow members of a public benefit or religious corporation to receive something of value only if it is in the public interest for them to do so. For example, the members may invest in a business corporation that is the surviving corporation in a merger with the public benefit corporation. A court should closely scrutinize the merger to make sure the conditions of section 11.02 have been met. In addition, it must find that the merger is in the public interest.

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SOUTH CAROLINA REPORTERS' COMMENTS

This section has no counterpart in the former provisions of Chapter 31, Title 33 nor in the formerly applicable South Carolina Business Corporation Act. Certain technical additions were made to the Model Act, including a clarifica- tion that if a religious corporation merges with a business or mutual benefit corporation that its assets must be distributed pursuant to its articles or to another charitable entity. The Model Act provision permitting distributions to members from a public benefit or religious corporation with court or Attorney General approval was deleted. Consideration was given as to whether the twenty-day period was too short and a determination was made that this was reasonable in these circumstances. This section also permits existing old legislatively chartered corporations to merge into new public benefit or religious corporations. This will permit these corporations to be governed by the provision of this chapter. See also section 33-31-1701 which specifically grants such entities the authority to merge.

Section 33-31-1103. Action on plan by board, members, and third persons.

(a) Unless this chapter, the articles, or bylaws require a greater vote or voting by class, a plan of merger to be adopted must be approved:

(1) by the board;

(2) by the members, if any, by two-thirds of the votes cast or a majority of the voting power, whichever is less; and

(3) in writing by any person whose approval is required by a provision of the articles authorized by Section 33-31-1030 for an amendment to the articles or bylaws.

(b) If the corporation does not have members, or does not have members entitled to vote on the merger, the merger must be approved by a majority of the directors in office at the time the merger is approved. In addition, the corporation shall provide notice of any directors' meeting at which such approval is to be obtained in accordance with Section 33-31-822(c). The notice also must state that the purpose, or one of the purposes, of the meeting is to consider the proposed merger.

(c) If the board seeks to have the plan approved by the members at a membership meeting, the corporation shall give notice to its members of the proposed membership meeting in accordance with Section 33-31-705. The notice also must state that the purpose, or one of the purposes, of the meeting is to consider the plan of merger and contain or be accompanied by a copy or summary of the plan. The copy or summary of the plan for members of the surviving corporation shall include any provision that, if contained in a proposed amendment to the articles of incorporation or

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bylaws, would entitle members to vote on the provision. The copy or summary of the plan for members of the disappearing corporation shall include a copy or summary of the articles and bylaws that will be in effect immediately after the merger takes effect.

(d) If the board seeks to have the plan approved by the members by written consent or written ballot, the material soliciting the approval shall contain or be accompanied by a copy or summary of the plan. The copy or summary of the plan for members of the surviving corporation shall include any provision that, if contained in a proposed amendment to the articles of incorporation or bylaws, would entitle members to vote on the provision. The copy or summary of the plan for members of the disappearing corporation shall include a copy or summary of the articles and bylaws that will be in effect immediately after the merger takes effect.

(e) Approval by a class of members is required on a plan of merger if the plan contains a provision that, if contained in a proposed amendment to articles of incorporation or bylaws, would entitle the class of members to vote as a class on the proposed amendment under Section 33-31-1004 or 33-31-1022. The plan is approved by a class of members by two-thirds of the votes cast by the class or a majority of the voting power of the class, whichever is less.

(f) After a merger is adopted, and at any time before articles of merger are filed, the planned merger may be abandoned, subject to any contractual rights, without further action by members or other persons who approved the plan in accordance with the procedure set forth in the plan of merger or, if none is set forth, in the manner determined by the board of directors.

(g) A plan of merger involving either a public benefit or mutual benefit corporation that would terminate all members or any class of members or redeem or cancel all memberships or any class of memberships must meet all the requirements of this chapter and specifically this subsection (g):

(i) Before adopting a resolution proposing a plan of merger, the board of a mutual benefit corporation shall give notice of the general nature of the amendment to the members.

(ii) After adopting a resolution proposing such a plan of merger, the notice to members proposing the merger shall include one statement of up to five hundred words opposing the proposed plan of merger if the statement is submitted by any five members or members having three percent or more of the voting power, whichever is less, not later than twenty days after the board has voted to submit such to the members for their approval. In public benefit corporations, the production and mailing

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costs must be paid by the requesting members. In mutual benefit corporations, the production and mailing costs must be paid by the corporation.

(iii) Any such plan of merger must be approved by the members by two-thirds of the votes cast by each class.

(iv) The provisions of Section 33-31-621 do not apply to any amendment meeting the requirements of this chapter.
OFFICIAL COMMENT

Section 11.03 sets forth the requirements for approving a merger.

If a corporation does not have members, unless the Model Act, the articles or bylaws require a greater vote, the plan of merger must be approved by a majority of the directors in office at the time the merger is approved. While it is usually not necessary to give directors notice of matters that will be considered at directors' meetings, subdivision (b)(4) requires that corporations without members not only notify the directors of the meeting but that the notice indicate that one of the matters to be considered at the meeting is the proposed merger.

If a corporation has members, the board must adopt the plan of merger and submit it to the members for their approval. Unless the Model Act, the articles or bylaws require a greater vote or voting by class, voting by class is required if the plan contains a provision that would require a class vote if it were contained in amendment to the articles or bylaws. The members must approve the plan of merger by a two-thirds vote of the votes cast or a majority of the voting power, whichever is less. The affirmative votes must also constitute a majority of the required quorum. See section 1.40(1). Class voting is required if the plan contains a provision that would require a class vote if it were contained in a bylaw or article amendment.

The notice of the meeting or material soliciting the approval must set forth the material facts concerning the merger. For example, if the members of the surviving corporation become subject to an article or bylaw provision that would normally require a vote of the members, they must be given a copy or summary of the provision prior to voting on the proposed merger. See subsections 12.03(d) and (e). Members of the disappearing corporation must receive a coy or summary of the complete articles and bylaws of the surviving corporation prior to voting on the merger. See subsections 12.03(d) and (e). Members of the disappearing corporation are entitled to the additional material because they were not subject to the articles and bylaws of the surviving corporation prior to the merger.

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If a plan of merger contains a provision that, if contained in an amendment to articles or bylaws, would entitle members of that class to vote as a class, the merger is not approved unless it is approved by that class of members. Each class entitled to vote must approve the plan by two-thirds of the votes cast or a majority of the voting power of the class, whichever is less. The affirmative votes also must constitute a majority of the required quorum. See section 1.40(1).

To provide flexibility, subsection (c) allows the board or the members in approving the merger to condition approval of the merger upon its receiving a higher percent of votes than would normally be required or on any other basis.

If the consent of a person is required pursuant to section 10.30 to approve an amendment to the articles or bylaws of a constituent corporation, that person's consent is also needed to approve a plan of merger. This requirement prevents the corporation from eliminating the person's right to approve an amendment by merging with a wholly owned subsidiary.
SOUTH CAROLINA REPORTERS' COMMENTS

1. Compared to former sections

Previously applicable law included provisions for the consolidation of churches. The former Sections 33-33-20 and 33-33-30 provided:
Whenever a consolidation of two or more such [church] corporations is proposed, identical plans for consolidation, which must include the name of the proposed consolidated corporation, shall be submitted to the congregations of such church corporations proposed to be consolidated at separate meetings of each congrega- tion, held after being called upon notice in the manner customary under the practice, bylaws, rules or regulation of the respective church corporations for the calling of business meetings. Such notices of the calling of such meetings shall advise the members of the respective congregations that a consolidation of the church corporations shall be considered and passed upon at the meeting.
If at the meetings of the respective congregations so held, two thirds of the members present at each meeting eligible to vote at business meetings under the practice, bylaws, rules or regulations of the respective church corporations vote in favor of the consolidation, the consolidation shall become effective upon the filing with the Secretary of State of a written copy of the plan of consolidation adopted, certified under oath by an officer of each corporation as a copy of the plan of consolidation adopted by the congregation of each of such corporations at meetings thereof called and held as provided herein, and upon the filing for record of a copy of the plan, certified to by the Secretary of State, in the office of the

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register of mesne conveyances or of the clerk of court in counties which do not have a register of mesne conveyances of the county of this State in which the principal office of the consolidated corporation is to be established and of the counties in which the respective corporations so consolidating shall have their original charters recorded, or, if any of the corporations shall have been created by special act of the General Assembly, in the county in which such corporation shall have had its principal office.

The present statute is different from the merger procedures required of business corporations in Section 33-11-103. (Prior to the adoption of this South Carolina Nonprofit Corporation Act, this section would have applied to nonprofit corporations.) South Carolina subsection (b) also differs slightly from the Model Act. Action is taken under (b) even if the corporation has members but they are not entitled to vote on the merger. Any modification to what votes are required to approve the merger must be provided in the bylaws (or articles). This differs from the Model Act.

2. Non-Model Act provisions

This section differs from Model Act in the following manner:

a. The directors have the sole power to approve the merger as provided in subsection (b) if the corporation does not have members or, different from the Model Act, if the members do not have voting rights regarding the merger. This change is in conformity with changes made in other sections. A nonprofit corporation might have members but the articles might specify that they do not vote on mergers.

b. The Model Act includes a provision which permits both the board and members to condition this approval on the receipt of a higher vote. Although this language does not appear in the South Carolina section, South Carolina corporations have the power to condition the approval on a higher vote but must do so in the articles or bylaws. This change is in keeping with the changes to Sections 33-31-1003 and 33-31-1202. It was determined that all voting modifica- tions belong in the articles or bylaws. In increasing the vote required of either directors or members, consideration also must be given to Sections 33-31-1023 and 33-31-1024. These provisions require that before raising the vote required to adopt certain issues, the resolution to increase the vote must pass by the same greater quorum or vote.

c. Section 33-31-1103(g) is not a Model Act provision. However, it is essentially the same as Section 33-31-1031. This paragraph prevents a corporation from eliminating all or a class of members through a merger without complying with the same rigorous requirements imposed in Section 33-31-1031 relating to an amendment to the articles which

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eliminates all or a class of members. See the Official Comments following Section 33-31-1031 for an explanation of this paragraph (g).

Section 33-31-1104. Articles of merger.

After a plan of merger is approved by the board of directors of each merging corporation and if required by Section 33-31-1103 by the members and any other persons, the surviving corporation shall deliver to the Secretary of State articles of merger setting forth:
(1) the plan of merger;

(2) if approval of members was not required, a statement to that effect and a statement that the plan was approved by a sufficient vote of the board of directors of each corporation;

(3) if approval by the members of one or more corporations was required:

(i) the designation, number of memberships outstanding, number of votes entitled to be cast by each class entitled to vote separately on the plan, and number of votes of each class indisputably voting on the plan; and

(ii) either the total number of votes cast for and against the plan by each class entitled to vote separately on the plan or the total number of undisputed votes cast for the plan by each class and a statement that the number cast for the plan by each class was sufficient for approval by that class;

(4) If approval of the plan by some person or persons other than the members of the board is required pursuant to Section 33-31-1103(a)(3), a statement that the approval was obtained.

(5) Unless a delayed effective date is specified, a merger takes effect when the articles of merger are filed.
OFFICIAL COMMENT

Upon filing the articles of merger with the secretary of state, the transaction becomes a matter of public record as the articles of merger set forth the plan of merger. A merger becomes effective when the articles of merger are filed with the secretary of state unless a delayed effective date is requested. See section 1.23.
SOUTH CAROLINA REPORTERS' COMMENTS

Other than with respect to church corporations, this provision has no counterpart in the former Chapter 31, Title 33 (see the South Carolina Reporters' Comments to Section 33-31-1103). This section is very similar to Section 33-11-105 in the South Carolina Business Corporation Act which previously governed non-church nonprofit corporations. The Model Act language has been clarified in certain respects. Paragraph (5) is not

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a Model Act provision and paragraph (3) notes that approval of one corpora- tion's members may be required but not of the other one.

Section 33-31-1105. Effect of merger.
When a merger takes effect:

(1) every other corporation party to the merger merges into the surviving corporation and the separate existence of every corporation except the surviving corporation ceases;

(2) the title to all real estate and other property owned by each corporation party to the merger is vested in the surviving corporation without reversion or impairment, subject to any and all conditions to which the property was subject before the merger;

(3) the surviving corporation has all liabilities and obligations of each corporation party to the merger;

(4) a proceeding pending against a corporation party to the merger may be continued as if the merger did not occur or the surviving corporation may be substituted in the proceeding for the corporation whose existence ceased;

(5) the articles of incorporation and bylaws of the surviving corporation are amended to the extent provided in the plan of merger; and

(6) the memberships or shares of each nonprofit or business corporation party to the merger that are to be converted into memberships, obligations, shares or other securities of the surviving or any other corporation or into cash or the other property are converted and the former holders of the member- ships or shares are entitled only to the rights provided in the articles of merger.
OFFICIAL COMMENT

Section 11.05 sets forth the legal effects of a merger. On the effective date of the merger the disappearing corporation merges and disappears into the surviving corporation. The surviving corporation owns all the property owned by each constituent corporation and is liable for all liabilities and obligations (contingent or otherwise) of each constituent corporation. Trust obligations on property of a disappearing corporation are limited to the property affected thereby immediately prior to the time the merger is effective. If the surviving corporation receives property that would have gone to a disappearing corporation, the property is subject to the same restrictions that would have applied had the property been received by the disappearing corporation. Where the property is given on the condition that it be used for specified purposes, that condition is not removed as a result of the merger. See section 11.07.

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