What is Corporation Dissolution?
Dissolution is the process by which a corporation terminates its existence. Corporations may choose to dissolve for a variety of reasons. Some of the most common reasons for terminating a corporation include the corporation having sold substantially all of its assets or the discontinuation of a business venture. As most corporations are registered in Delaware, companies should understand the procedures for undergoing dissolution and complying with the statutory requirements.
What approvals are required for a corporate dissolution in Delaware?
Under the Delaware General Corporation Law (“DGCL”) any decision to dissolve a corporation must be approved by either (i) a resolution approved by a majority of the board of directors followed by a notice to, and approval of, a majority of the outstanding stock of the corporation entitled to vote on that matter; or (ii) The unanimous consent of all of the stockholders entitled to vote on that matter, with no prior action by the board. Note, however, that the DGCL also allows the board of directors to specify that the dissolution of a corporation may be abandoned without any further action or consent from the stockholders, even after the stockholders have approved the dissolution of the corporation. In joint ventures where there are only two members owning a 50% share, the parties may petition the court for dissolution should they fail to reach an agreement on how to terminate the existence of their enterprise.
What must your lawyer do once you have dissolved the company?
Once a corporation authorizes dissolution, company counsel should prepare and file a certificate of dissolution with the Secretary of State of Delaware in accordance with Section 103 of the DGCL. The certificate must include: (i) the name of the corporation; (ii) the date the dissolution was authorized; (iii) whether the dissolution was authorized by the board and the stockholders or all the stockholders without the board; (iv) the names and addresses of all corporate directors and officers; and (v) the date of the corporation’s original filing of a certificate of incorporation. The dissolution becomes effective once the certificate of dissolution is accepted and stamped by the secretary of state. Note, however, that no corporation will be deemed as dissolved until the payment of all franchise taxes are paid to the state.
What activities can a corporation engage in after dissolution?
While dissolution is effective on the date the certificate is accepted by the Secretary of State, the DGCL still continues a dissolved corporation’s existence for a period of three years after the dissolution for the purposes of the following: (i) prosecuting and defending law suits; (ii) settling and closing the business; (iii) selling or disposing of property; (iv) discharging of liabilities and distributing assets. With the exception of these limited carve outs, a dissolved corporation may not otherwise continue its business. However, after the three-year period has passed, an individual showing good cause may petition the Chancery Court to appoint one or more trustees or receivers to take charge of the corporation’s property, to collect e debts and property due and belonging to the corporation and with the power to prosecute or defend lawsuits in the name of the corporation.
What to do when winding up the corporation?
After the dissolution is accepted, the corporation may begin the “winding up” process. This can be done either through the default procedure or the safe harbor.
Safe Harbor Procedure
If the corporation elects to use the safe harbor procedure the corporation must send a notice to all known claimants asking them to submit information about any claim they may have against the corporation and specifying when the claim must be received. The notice must also be published in a newspaper of general circulation at least once a week for two weeks in the county where the corporation’s registered agent and principal place of business is located. For corporation’s with at least $10 million in assets, the notice must be published at least once in a newspaper of national circulation.
The default procedure requires the corporation to adopt a plan of distribution whereby the corporation pays or makes a provision of payment for all known claims or make a provision for payment of all known and unknown claims to arise within ten years of the date of dissolution. If the company has sufficient assets, the plan implemented should specify that all claims will be paid in full. Any remaining assets can be distributed to the stockholders.
Which Procedure should you select?
The procedure that works best for a corporation will depend on its specific situation but a few general principles should be considered. For example, the default procedure is generally less expensive and less time consuming, requires less involvement from attorneys since there are no notice or court procedures involved, and the corporation limits the risk of encouraging new claims by not publishing notices. When a corporation has few assets and there is little to no risk of unknown claimants the default procedure might be the better option.
The main advantage of the safe harbor is the opportunity for the corporation to bar claims that do not comply with the time or notice requirements provided. No matter which method a corporation chooses it must determine how to provide for current and future claims. One such method is to create a liquidating trust to distribute the assets according to priority of claims.
What if I registered a company and never conducted any business do I still need to dissolve?
The DGCL provides a process for dissolving corporations that never issued any shares to its shareholders. In this case a majority of the incorporators can dissolve a corporation by filing with the secretary of state affirming the following: (i) no shares have been issued or the corporation’s business has not begun; (ii) no capital has been paid, or if it has been paid, it has been returned; (iii) all debts have been paid (in the event the corporation did begin any minor business activities); (iv) all stock certificates have been surrendered or cancelled; and (v) all rights and franchises of the corporation have been surrendered. Once this filing has been made and accepted the corporation will be considered dissolved.
If you are considering dissolving a Delaware corporation or interested in learning about any of the issues covered in this article please contact one of our attorneys at firstname.lastname@example.org or visit our website at www.rbernardllp.com.