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Other than as to church consolidations, the former Chapter 33, Title 33 had no provisions for mergers. The former church statutes found in the former Chapter 33 read as follows:
When the plan of consolidation adopted is certified to, filed and recorded as in Section 33-33-30 required, the separate existence of the constituent corporations shall cease and the consolidating corporations shall become a single corporation, in accordance with the plan, possessing all of the powers of church corporations provided in Section 33-31-100, and all property, real, personal and mixed, all debts due on whatever account and all other things in action belonging to each of such corporations shall be vested in the consolidated corporation. And all property, rights, privileges and powers and every other interest shall be thereafter as effectually the property of the consolidated corporation as they were of the several and respective former corporations and the title to any real estate, whether by deed or otherwise under the laws of this State vested in either of such corporations, shall not revert or be in any way impaired by reason of the provisions herein. But all rights of creditors and all liens upon the property of either of such former corporations shall be preserved unimpaired, limited in lien to the property affected by such liens at the time of the consolidation, and all debts, liabilities and duties of the respective former corporations shall thenceforth attach to the consolidated corporation and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by it.
Any action or proceeding pending by or against either of the corporations consolidated may be prosecuted to judgment, as if such consolidation had not taken place, or the new corporation may be substituted in its place.

The existing South Carolina Business Corporation Act contains a provision that is very similar to this new Section 33-31-1105. It is Section 33-11-106 and was applicable to non-church nonprofit corporations prior to the adoption of this South Carolina Nonprofit Corporation Act. Note that any trust obligations upon property of a disappearing corporation shall be limited to the property affected thereby immediately prior to the time the merger is effective. A version of paragraph (6), a non-Model Act paragraph, appears in the South Carolina Business Corporation Act as Section 33-11-106(b).

(a) Except as provided in Section 33-31-1102, one or more foreign business or nonprofit corporations may merge with one or more domestic nonprofit corporations if:

(1) the merger is permitted by the law of the state or country under whose law each foreign corporation is incorporated and each foreign corporation complies with that law in effecting the merger;

(2) the foreign corporation complies with Section 33-31-1104 if it is the surviving corporation of the merger; and

(3) each domestic nonprofit corporation complies with the applicable provisions of Sections 33-31-1101 through 33-31-1103 and, if it is the surviving corporation of the merger, with Section 33-31-1104.

(b) Upon the merger taking effect, the surviving foreign business or nonprofit corporation is deemed to have irrevocably appointed the Secretary of State as its agent for service of process in any proceeding brought against it.
OFFICIAL COMMENT

Section 11.06 authorizes foreign nonprofit and business corporations to merge with nonprofit corporations if there is an applicable law in their respective states of incorporation and the law's provisions are met. Of course, the provisions of the Model Act must also be complied with in carrying out the merger.

If the surviving corporation is a foreign corporation, the merger results in its irrevocably appointing the secretary of state as its agent for service of process in any proceeding brought against it. This appointment is not limited to matters arising out of or relating to the merger, but applies to any and all claims that might be made against the foreign corporation.
SOUTH CAROLINA REPORTERS' COMMENTS

The formerly applicable statute, Section 33-11-107 of the South Carolina Business Corporation Act, is parallel to this provision, although the language and mechanics are very different.

Section 33-31-1107. Bequests, devises, and gifts not affected by merger.

Any bequest, devise, gift, grant, or promise contained in a will or other instrument of donation, subscription, or conveyance, that is made to a constituent corporation and that takes effect or remains payable after the merger, inures to the surviving corporation unless the will or other instrument otherwise specifically provides.
OFFICIAL COMMENT

Bequests, devise, gifts and grants to a disappearing corporation that take effect or remain payable after a merger inure to the benefit of the

A provisions in a will or other instrument requiring that a bequest or gift be used for a specified purpose is not negated by a merger even if the surviving corporation is not engaged in the same activities as the disappearing corporation. It can only use the property for the specified purposes. If the surviving corporation cannot or does not want to use the bequest or gift for the purposes specified, it must seek court approval for a variance. The question of whether a variance will be granted is left to the cy pres doctrine or other applicable state law.

Section 11.07 only applies to bequests, devises, gifts and grants that take effect or remain payable after a merger. Section 11.05 applies to transfers that take effect prior to the merger.
SOUTH CAROLINA REPORTERS' COMMENTS

This is an entirely new provision. It has no counterpart in the former Chapter 31, Title 33 or in the South Carolina Business Corporation Act.

Section 33-31-1201. Sale of assets in regular course of activities and mortgage of assets.

(a) A corporation, on the terms and conditions and for the consideration determined by the board of directors, may:

(1) sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property in the usual and regular course of its activities; or

(2) mortgage, pledge, dedicate to the repayment of indebtedness, whether with or without recourse, or otherwise encumber any or all of its property whether or not in the usual and regular course of its activities.

(b) Unless the articles require it, approval of the members or any other person of a transaction described in subsection (a) is not required.
OFFICIAL COMMENT

Section 12.01 deals with two types of transactions. In the first type a nonprofit corporation sells or otherwise disposes of all, or substantially all, of its property in the usual and regular course of its activities. While such a sale or disposition would normally not be in the regular course of its activi- ties, if it is, it may be approved by the board alone unless the articles require approval of the members or some other person.

The second type of transaction is one in which a nonprofit corporation mortgages pledges or dedicates to the repayment of indebtedness any or all of its property whether or not in the usual and regular course of its activities. This type of transaction would normally arise when a bank or

The question of what is "substantially all" of a corporation's property is a factual question to be determined after an examination of all relevant facts. "The phrase `substantially all' is synonymous with `nearly all' and was added merely to make it clear that the statutory requirements could not be avoided by retention of some minimal or nominal residue of the original assets. A sale of all the corporate assets other than cash or cash equivalents is normally the sale of `all or substantially all' of the corporation's property." Official Comment to Section 12.01 of the Model Business Corporation Act. Moreover, a series of related transactions that in total amount to the sale of all, or substantially all, of a corporation's property may be treated as a single transaction if they are part of an overall plan to dispose of all, or substantially all, of the corporation's property.

The board in approving a transaction under section 12.01 must meet its fiduciary obligations under sections 8.30 and 8.31.
SOUTH CAROLINA REPORTERS' COMMENTS

This section is almost identical to Section 33-12-101 of the South Carolina Business Corporation Act, the formerly applicable statute. It has no counterpart in the former Chapter 31, Title 33.

Section 33-31-1202. Sale of assets other than in regular course of activities.

(a) A corporation may sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property, with or without the goodwill, other than in the usual and regular course of its activities on the terms and conditions and for the consideration determined by the corporation's board if the proposed transaction is authorized by subsection (b).

(b) Unless this chapter, the articles, or bylaws, require a greater vote or voting by class, the proposed transaction to be authorized must be approved:
(1) by the board;

(2) by the members 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.

(c) If the corporation does not have members, or does not have members entitled to vote on the transaction, the transaction must be

(d) If the corporation seeks to have the transaction 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 sale, lease, exchange, or other disposition of all, or substantial- ly all, of the property or assets of the corporation and contain or be accompanied by a copy or summary of a description of the transaction.

(e) If the board needs to have the transaction 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 a description of the transaction.

(f) A public benefit or religious corporation must give written notice to the Attorney General twenty days before it sells, leases, exchanges, or otherwise disposes of all, or substantially all, of its property if the transaction is not in the usual and regular course of its activities unless the Attorney General has given the corporation a written waiver of this subsection.

(g) After a sale, lease, exchange, or other disposition of property is authorized, the transaction may be abandoned, subject to any contractual rights, without further action by the members or any other person who approved the transaction in accordance with the procedure set forth in the resolution proposing the transaction or, if none is set forth, in the manner determined by the board of directors.
OFFICIAL COMMENT

A sale or other disposition of all, or substantially all, of a corporation's property other than in the usual and regular course of its activities must meet the requirements set forth in section 12.02. See the Official Comment to Section 12.01 for a discussion of the meaning of the phrase "all or substantially all". The notice requirements are similar to the approval and notice requirements for a merger. See the Official Comment to Section 11.03.

1. New provision, similar to Section 33-12-102

This is an entirely new provision for Chapter 31, Title 33, but it is similar to the language of the previously applicable Section 33-12-102 in the South Carolina Business Corporation Act.

2. Non-Model Act provisions

This South Carolina section differs from Model Act in the following manner:

a. The directors have the sole power to sell the assets as provided in subsection (c) if the corporation does not have members or, different from the Model Act, if the members do not have voting rights regarding the sale of assets. 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 the sale of assets.

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, the corporation still reserves this power to condition the approval on the receipt of a higher vote, but must do so in the articles or bylaws. This change is in keeping with the changes to Section 33-31-1003 and other sections. It was determined that all voting modifications belong in the articles or bylaws. In increasing the vote required of either directors or members, consideration must also 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.

Note that in the Business Corporation Section 33-12-102 the following language is found:
(c) The board of directors may condition its submission of the proposed transaction on any basis.
(e) Unless the articles of incorporation require a different vote or the board of directors (acting pursuant to subsection (c)) requires a greater vote than that specified by this subsection or the articles of incorporation or a vote by voting groups, the transaction to be authorized must be approved by two-thirds of all the votes entitled to be cast on the transaction.

Section 33-31-1301. Prohibited distributions.

Except as authorized by Section 33-31-1302, a corporation may not make any distributions.
OFFICIAL COMMENT

Section 13.01 sets forth the basic rule that a corporation is prohibited from making any distributions. The term "distributions" is defined in section 1.40(10) as the "payment of a dividend or of any part of the income or profit of a corporation to its members, directors or officers." See Official Comment to Section 1.40, Comment 5.

Section 13.01 does not prohibit the transfer of property to members of nonprofit corporations under any and all circumstances. However, the prohibition on payment of dividends is quite broad. If a transfer is a direct payment to a member as a result of his or her interest in the nonprofit corporation, it is prohibited. Cash dividends from whatever source are the clearest example of prohibited dividends. See Kubik v. American Alliance, Inc., 54 N.Y.S.2d 764 (1945).

The question arises as to what a corporation can do with profits it generates as it cannot use the profits to pay dividends. Public benefit and religious corporations typically use profits to further their public, charitable or religious purposes. Mutual benefit corporations usually use profits to improve their facilities and services. In Burton Potter Post No. 185, American Legion v. Epstein, 219 N.Y.S.2d 224 (1961), a nonprofit club generated profits from its activities. The funds were used to improve the club facilities. The court found that the corporation was "not

While the members benefit from the use of funds for club purposes, that benefit is not a dividend and is not considered a distribution because the corporation is conferring benefits upon its members in conformity with its purposes.

A payment that is not derived from "any part of the income or profit of a corporation to its members, directors or officers" is not a distribution. Thus the return of an overcharge or the providing of services for which members have paid is not a distribution. Nor is the payment of reasonable compensation for services rendered.
SOUTH CAROLINA REPORTERS' COMMENTS

This provision has no counterpart in the former Chapter 31, Title 33 nor does it have any direct counterpart in the South Carolina Business Corporation Act.

South Carolina does have a non-Model Act definition of the term "distribution" found in Section 33-31-140 which reads:
Distribution means the direct or indirect transfer of assets or any part of the income or profit of a corporation, to its members, directors, or officers. The term does not include:
(A) the payment of compensation in a reasonable amount to its members, directors, or officers for services rendered;
(B) conferring benefits on its members in conformity with its purposes; or,
(C) repayment of debt obligations in the normal and ordinary course of conducting activities.

Section 33-31-1302. Authorized distributions.

(a) A mutual benefit corporation may purchase its memberships if after the purchase is completed:

(1) the corporation would be able to pay its debts as they become due in the usual course of its activities; and

(2) the corporation's total assets would at least equal the sum of its total liabilities.

(b) Corporations may make distributions upon dissolution in conformity with Sections 33-31-1401 through 33-31-1440 of this chapter.
(c) The board of directors may base a determination that a distribution is not prohibited under subsection (a) either on financial statements prepared on the basis of accounting practices and principals that are reasonable in the circumstances or on a fair valuation or other method that is reasonable in the circumstances.

Section 13.02(a) is new, but is not inconsistent with section 26 of the prior version of the Model Nonprofit Corporation Act. It is based in part on section 6.40 of the Model Business Corporation Act. Section 13.02(b) is based upon and represents no substantive change from section 26.

1. Purchase of Memberships

Mutual benefit corporations may purchase their memberships if the two test of section 13.02(a) are met. Each test is designed to protect creditors.

The first test is that after the purchase of a membership the corporation "would be able to pay its debts as they become due in the usual course of its activities." Section 13.02(a)(1). A determination of whether this test is met requires the directors to form "a conclusion that known obligations of the corporation can reasonably be expected to be satisfied over the period of time that they will mature. It is not sufficient simply to measure current assets against current liabilities, or determine that the present estimated `liquidation' value of the corporation's assets would produce sufficient funds to satisfy the corporation's existing liabilities." Official Comment to Section 6.40 of the Model Business Corporation Act.

In determining whether the first test is met the directors must exercise their duty of care under section 8.30, and are entitled to rely on information or reports they receive. See section 8.30(b).

The second test requires that after the purchase of a membership the corporation's "total assets would at least equal the sum of its total liabilities." Section 13.02(a)(2). If the corporation uses generally accepted accounting principles and the directors rely on corporate officers or accountants under section 8.30(b), it should be easy to determine if the second test is met. If generally accepted accounting principles are not used, the corporation should use practices and principles that are reasonable under the circumstances.

2. Payments Upon Dissolution

Section 13.02 allows public benefit, mutual benefit and religious corporations to make distributions to their members if the provisions of Chapter 14 are met.

Chapter 14 sets forth provisions governing the disposition of assets upon dissolution. Normally the members of a mutual benefit corporation will receive its "net worth" upon dissolution. Members of a public benefit or religious corporation normally will not share in its "net worth" upon dissolution. This is because they do not have any economic interest in its assets. However, under the very limited circumstances set forth in section 14.06, a public benefit or religious corporation may distribute its assets to its members if those members are recognized as exempt under section

This section has no counterpart in the former Chapter 31, Title 33 but is similar to formerly applicable statute, Section 33-6-400(b) of the South Carolina Business Corporation Act. Both statutes prohibit distributions if the corporation thereafter would be unable to pay its debts or if the assets would be less that its liabilities.

2. Distributions do not include "contributions"

It should be noted that the term "distributions" does not include "conferring benefits on its members in conformity with its purposes." See Section 33-31-140. Therefore, if the corporation has members who themselves are nonprofit corporations, the "parent" corporation might be permitted to make a payment to one of its members. For example, if the Boy Scouts as a corporate entity is deemed to be a member of United Way, United Way could make a payment to the Boy Scouts.
3. Non-Model Act provision

Paragraph (c) is not a Model Act provision. However, identical language is found in the previously applicable statute, South Carolina Business Corporation Act, Section 33-6-400.

Section 33-31-1401. Dissolution by incorporators.

(a) The incorporators of a corporation that has no members and that does not yet have initial directors, upon written consents signed by a majority of the incorporators, or through a vote of a majority of the incorporators at a meeting of the incorporators, subject to any approval required by the articles or bylaws, may dissolve the corporation by delivering to the Secretary of State articles of dissolution.

(b) The incorporators in approving dissolution shall adopt a plan of dissolution indicating to whom the assets owned or held by the corporation will be distributed after all creditors have been paid.
OFFICIAL COMMENT

Section 14.01 allows a majority of the incorporators or directors of corporations that have no members to dissolve the corporation by delivering articles of dissolution to the Secretary of State. [In South Carolina, this section only applies to incorporators.] See section 14.04 which specifies the information that must be contained in articles of dissolution.

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