Board Resolution: Accepting Contributions and Issuing Shares to Parent Company
(MA Corporation)

Summary

This template board resolution is for use by a Massachusetts corporation to document the board of directors' approval/acceptance of contributions from its parent, and the issuance of shares to the parent in exchange for said contributions. This template includes practical guidance, drafting notes, and an optional clause. A contribution of a corporate parent's assets or stock to a subsidiary is an intra-company transfer—ostensibly a bargained-for exchange between two legally distinct entities when both entities are under common control. This doctrinal construct of legal independence exists despite the reality that a corporate parent has considerable control over its subsidiary—especially a wholly owned subsidiary. Intra-company transfers occur for strategic (i.e., mergers, acquisitions, divestitures, diversification, etc.) or financial engineering (i.e., tax savings, etc.) reasons. The benefit of such a transaction will be enjoyed variably by the parent and its subsidiary. Further to ostensible independence, an exchange of assets requires an approving resolution by the board of directors of each corporation—presumably, after exercising due care in their review of the merits and demerits of the transfer. Accordingly, intra-company transfers fall within the purview of the business judgment rule applicable to corporate board action and, therefore, are generally not subject to subsequent shareholder suits. Moreover, the authority of a board is generally plenary with respect to corporate actions, including all forms of corporate reorganizations and subsidiary creations. However, this authority may be subject to certain express limitations, either mandated by state corporate law statutes or authorized therein for inclusion in a corporation's formation documents—its articles of organization and bylaws. Counsel should review the corporation's articles of organization and bylaws to determine if any corporate governance restrictions apply and the relevant voting standard for board action—whether by quorum (and the applicable measure (e.g., a majority or two-thirds present, etc.)) or by an absolute standard (and the applicable measure). Additionally, a corporation's formation documents (and for closely held corporations, shareholder agreements) may further establish the circumstances in which a board's authority is subject to a vote of the shareholders of one or more classes or series of stock. However, in the case of a wholly owned subsidiary, a vote of its sole shareholder (its parent) is superfluous because by definition 100% of a wholly owned subsidiary's capital shares are owned by the parent. This presents a critical distinction between a wholly owned and a closely held subsidiary—let alone a publicly held subsidiary. Beyond these corporate governance considerations with respect to the capitalization of a subsidiary, the parent corporation must also determine, first, whether it may do so, and second, how to do so. Mass Ann. Laws ch. 156D, § 3.02(a)(4) establishes that a corporation may "sell, convey, mortgage, pledge, lease, exchange and otherwise dispose of, all or any part of its real or personal property, or any legal or equitable interest in such property, wherever located." Moreover, Mass Ann. Laws ch. 156D, § 3.02(a)(6) empowers a Massachusetts corporation to "to purchase, receive, subscribe for, or otherwise acquire, to own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and with shares or other interests in, or obligations of, any other entity." Additionally, Mass Ann. Laws ch. 156D, § 6.21 specifies the several types of consideration authorized for the issuance of the corporation's shares (subject to any applicable restrictions in the articles of organization), including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation. Notwithstanding that a Massachusetts board's discretion in capitalizing a wholly owned subsidiary will be generally unfettered by the parent's shareholders, counsel is cautioned to carefully review the Massachusetts Business Corporation Act and the formation documents of each corporation for other controlling considerations in the circumstances. Counsel is cautioned to also carefully consider Mass Ann. Laws ch. 156D, § 11.03 governing share exchanges. If such exchange is not properly structured, documented, and accounted for, the parent may unintentionally cause a statutory short form merger with the subsidiary instead of arranging for a mere share-for-share capitalization while maintaining corporate separateness. A template resolution for relevant action by a subsidiary's board is presented below. For a template resolution of the parent company, see Board Resolution: Contributing Assets or Shares to Wholly Owned Subsidiary (MA Corporation). For a template resolution for approving a significant commercial contract by a Massachusetts corporation, see Board Resolution: Significant Commercial Contract Approval (MA Corporation). For additional information and resources on corporations in Massachusetts, see Corporation Resource Kit (MA), and for a full listing of key content covering board resolutions for private company corporate governance, see Private Company Corporate Governance Board Resolutions Resource Kit.