Court of Chancery Points Dissolution Petitioners to First Day Affidavits of Bankruptcy Petitioners

Fox Rothschild LLP

Fox Rothschild LLP

The Court of Chancery recently issued a decision providing guidance to practitioners submitting petitions in corporate dissolution proceedings.  A copy of the Court’s decision can be found here: In the Matter of Global Safety Labs, Inc.

Section 280 of the DGCL establishes an optional, court-supervised process that a corporation can follow to wind up its affairs, including obligations to post security for claims.  The Court noted that Section 280 proceedings are often ex parte and the petitions generally contain bare-bones conclusory averments.  In his decision, Vice Chancellor Laster found that “[i]n these types of proceedings, the court requires more information, including about the entity, its history, the path that led to the relief being sought, and the parties who could be affected by the relief.”  A model to provide this information to the Court can be found in the first-day declaration filed in support of a Chapter 11 bankruptcy petition.

Global Safety Labs filed a Section 280 Petition in the Chancery Court seeking a determination that it was not obligated to post any security for claims based upon the existence of a secured creditor with a properly perfected security interest and indisputable priority to claim all of the dissolving corporation’s assets.  In such situations, “setting security for the junior claims becomes a trivial matter [because] even if those claims proceed to judgment for astronomical amounts, the junior claimants will not have any right to collect.”  However, the Court found that it did not have sufficient information to make such a determination and directed the company to supplement the record with information typically found in a bankruptcy First Day Declaration, including:

  • The Company’s organizational and capital structure.
  • Both the debt side and the equity side of the Company’s balance sheet.
  • Events leading to the Company’s dissolution as well as any alternatives to dissolution that the Company explored and why the option of dissolution was chosen.
  • What the Company hopes to achieve and why.

The Court concluded with stating that counsel are in the best position to determine the information that the Court needs. When preparing a dissolution petition, counsel should consider “what information they would like to know before providing advice to an entity about its prospects for seeking relief under Section 280” or “what type of information they would share with a colleague if they were asking for input or advice.”

[View source.]

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