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APPELLATE RULING PROVES POWER OF A CORPORATE CLEAN UP

Written by Zana Tomich on February 26, 2020 Category: Firm News

A recent case by the Michigan Court of Appeals demonstrates the consequences of failing to keep corporate records in check.  In Touchwerx, Inc. v. Dynics, Inc., a Michigan Court of Appeals case, a merger that was endorsed by the State, but not fully effectuated by the parties, was discovered nearly 10 years after the plan of merger.

The case tells the story of a 2008 plan of merger between Panelworx, Inc. and Dynics, Inc. that appears to have not been fully consummated per the terms of the plan.  Panelworx was to be merged into Dynics.  Consent resolutions formally authorizing and directing the Merger Agreement were executed by Panelworx’s directors, and in October 2010, Certificates of Merger were endorsed by the State of Michigan. The Court explained:

“Section 2.2 of the Merger Agreement provided for the conversion of Panelworx stock into Dynics stock; specifically, “[a]t the Effective Time, . . . each share of the common stock of [Panelworx] outstanding immediately before the Effective Time, by virtue of the Merger, shall be converted into the right to receive one (1) share of fully paid and non-assessable common stock of [Dynics].” By virtue of the expected redemptions of Panelworx stock as set forth in Section 3.1, it was anticipated, as stated in Section 2.1 of the Merger Agreement, that “[a]s of the date of the Effective Time, there will be 4,500 outstanding shares of [Panelworx] common stock.”

Yet, nearly 10 years later, it was not entirely clear that the shareholders of the merged entity (Panelworx) were actually shareholders of Dynics after the effectuated Merger.

While certain steps occurred, the proposed redemption of stock in the merged entity did not occur, resulting in some confusion.  In 2016, Uhrick, one of the merged entity’s shareholders, sent an email to Gatt, a Dynics shareholder, asking for the Dynics stock certificates which he never received after the merger with Panelworx.  Not until the question went unanswered, and another year went by, did Ulrick ask for an accounting of the financial information of Dynics.

Plaintiffs filed suit in August 2018, ten years after the original plan of merger, alleging among other things, that Plaintiffs be declared ownership rights in Dynics, and specifically that Touchwerx holds 13,500 shares.

The trial court initially dismissed the case on the defense of expiration of statute of limitations, given the Defendants claimed the claim arose on October 19, 2010. Plaintiff argued the claim arose when first discovered in February 2, 2017, when defendants refused their rights as shareholders.  The appellate court found the issue a bit more complicated.

The appellate court found clear and undisputed evidence that the Merger Agreement became effective on October 19, 2010, and the merger of Panelworx into Dynics in fact occurred.  Panelworx did not exercise its right to cancel the merger, and therefore the Merger Agreement did not terminate.  Therefore, it appeared arguable the shareholders of Panelworks in fact merged into Dynics.  The appellate court found the trial court erred in dismissing the case, stating that further factual development and legal argument were required. At the trial court level, Defendant’s argument that Plaintiffs were not shareholders and therefore not entitled to inspection under MCL 450.1487(2) therefore, that count should also be dismissed. The appellate court disagreed, and found the trial court was to accept the allegations as true, and allow for further factual development.  This count was also reversed and remanded for further proceedings.

The takeaway of this case is that the Plaintiffs here could have used a corporate clean up, much earlier than 2016, which would have uncovered the problem of not receiving signed certificates, and lack of corporate documents documenting the finalized merger.  A corporate clean up a few years after the merger would have revealed these issues well within the statute of limitations and served all parties while memories of the relevant parties were still fresh.

If you suspect some documents have slipped through the cracks, contact me to discuss how a Corporate Clean up could benefit your company.

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