Board Resolution: Asset or Share Contributions to Wholly Owned Subsidiary
(TX Corporation)

Summary

This is a template for a board resolution for contribution of assets or shares from a Texas corporation to a wholly owned subsidiary. This template includes practical guidance and drafting notes. A contribution of a corporate parent's assets or capital stock to a subsidiary is an intra-company transfer—meaning from one legally distinct entity to another when both entities are under common control. These transfers generally occur for strategic (i.e., mergers, acquisitions, divestitures, diversification, etc.) or financial engineering (i.e., tax savings, etc.) reasons. The benefit of such transaction will be enjoyed variably by the parent and its subsidiary. Relevant board resolutions record that each corporation's board of directors approved the transaction—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 certificate of formation and bylaws. Counsel should review the corporation's certificate of formation 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—i.e., 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, a Texas corporation must also determine, first, whether it may do so, and second, how to do so. Texas Business Organizations Code Section 21.455(a) establishes that, except as provided for in the corporation's certificate of formation, a transfer or other conveyance of assets does not require shareholder approval unless the "transaction constitutes a sale of all or substantially all of the assets of the corporation." Section 21.159 specifies the several types of consideration that the board may authorize for the issuance of the corporation's shares, including cash and securities. Additionally, Section 21.160(c) provides that "a corporation may dispose of treasury shares for consideration that may be determined by the board." Notwithstanding that a Texas 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 Texas Business Organizations Code (and foreign law if the subsidiary is incorporated elsewhere) and the formation documents of each corporation for other controlling considerations in the circumstances. When a subsidiary of a Texas corporation is to be capitalized by a contribution of the parent's share capital, the parent's board should ensure that sufficient authorized and unissued (or else treasury) shares exist for such purpose and, if not, whether additional shares may be issued. Counsel is advised to review Section 21.151 of the Texas Business Organizations Code in conjunction with the corporation's formation documents in this regard. Moreover, whether all or part of the corporation's treasury shares have already been cancelled by resolution of the board will also be a consideration. Code Sections 21.171 and 21.252 are authoritative in this regard. Additionally, if the shares to be used by the parent to capitalize its subsidiary are redeemable shares, counsel should also carefully review Sections 21.251 through 21.254 inclusive for other important, specific considerations. Additionally, counsel is cautioned to carefully consider Texas Business Organizations Code Section 21.454 governing "share exchanges." If such share exchange is not properly structured, documented and accounted for, the parent may unintentionally cause a "statutory short form merger" with its subsidiary instead of arranging for a mere share-for-share capitalization while maintaining corporate separateness. For a full listing of key content covering Board Resolutions for Private Company Corporate Governance, see Private Company Corporate Governance Board Resolutions Resource Kit. For more resources and information on Texas corporations, see Corporation Resource Kit (TX).