What stockholder approval is necessary to sell a company?

The stockholder approval required to sell a company generally depends on the structure of the transaction, the jurisdiction of the company’s incorporation and the requirements of the company’s governing documents. In the U.S., technology companies typically are not sold in direct share sales. Instead, transactions typically are structured as mergers (which is a state law process) or sales of assets, where the company survives the transaction.

If the company is being sold through a direct share sale, the approval of 100 percent of the stockholders will effectively be required, as each stockholder will need to sign the definitive agreement to sell their shares. Note, however, that once a buyer obtains 90 percent of the outstanding shares of each class, it can acquire the remainder of the shares of the company through a short-form merger, for which no stockholder approval is required, as long as the consideration and other terms offered to the remaining stockholders are identical to what was offered in the earlier transaction.

As noted above, direct share sales are burdensome as every stockholder has to negotiate and enter into an agreement, so they are uncommon among technology companies.

If the company is being sold through a merger:

• Under Delaware law, generally, the approval of holders of at least a majority of the outstanding shares will be required.
• Under California law, generally, the approval of holders of at least a majority of the outstanding shares of each class will be required. Note that California law on this point applies to companies incorporated in California as well as to companies incorporated in other jurisdictions if the number of their shareholders and the extent of their operations in California exceed certain thresholds (see FAQ: “Will a Delaware corporation doing business in California be subject to California corporate law?”).
• The certificate or articles of incorporation of the company might also contain protective provisions that require the additional approval of holders of at least a majority (or greater percentage) of certain classes or series of shares. Even if the certificate or articles of incorporation do not provide for a series or class vote, additional votes of a series or class of shares may be required if the transaction treats the series or class differently than is provided in the governing documents.
• It is relatively common for a buyer to request that a company obtain the approval of holders of an even greater percentage of shares (often around 90 percent) for a merger in order to limit the number of stockholders that may exercise appraisal or dissenters’ rights.
• It is also relatively common for a buyer to request that holders of a certain percentage of the shares of a private company expressly agree to be liable for the indemnification obligations set forth in the merger agreement.

If the company is being sold through an asset sale:

• Under Delaware law, generally, the approval of holders of a majority of the outstanding shares will be required.
• Under California law, generally, the approval of holders of a majority of the outstanding shares will be required.
• The certificate or articles of incorporation of the company might also contain protective provisions that require the additional approval of at least a majority (or greater percentage) of certain classes or series of shares.
• It is relatively common for a buyer to request that the holders of a certain percentage of the shares of a private company agree to be liable (either directly or as guarantors) for the indemnification obligations of the company set forth in the asset purchase agreement.

In the context of any structure of transaction, additional votes may be required if the company being sold is private to approve compensation being paid in connection with the transaction under Section 280G of the Internal Revenue Code, as amended. The voting requirement for a compensation vote under Section 280G is 75 percent of the disinterested stockholders. The consequences of failing to obtain the vote are that the person receiving the compensation is subject to significant excise taxes and that the company cannot deduct the compensation.

You should be aware that there are exceptions to the general rules stated above. A company contemplating a sale should seek the advice of its counsel regarding the optimal structure and required stockholder approval required for any particular transaction, ideally prior to the signing of a term sheet. Voting considerations are not the only factor to take into account. Other issues, such as taxation, are also important in determining transaction structure.

---

The answer provided is for general informational purposes only, does not constitute legal advice, and may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome. For more information, see the site’s Terms of Use.