Exit Transactions - July 12 Flashcards
What is the dissolution of a corporation? (Q)
Dissolution is the process by which a corporation ceases to carry on business activities except those required to wind up its affairs. Thus, a dissolved corporation continues to exist for purposes of paying its debts, collecting and disposing of its assets, and conducting other activities related to winding up and liquidating its business.
Does dissolution transfer title to a corporation’s property? (Q)
No. Dissolution does not by itself transfer title to a corporation’s property. Instead, the corporation must dispose of its property in the process of winding up and liquidating its business.
Does dissolution prevent transfer of the corporation’s shares or other securities? (Q)
No. Dissolution does not by itself prevent transfer of the corporation’s shares or other securities. The corporation may still transact its securities in the course of winding up and liquidating its business.
Does dissolution change the standards of conduct required of the corporation’s directors and officers? (Q)
No. Dissolution does not change the standards of conduct required of the corporation’s directors and officers. The directors and officers retain all duties and liabilities that they had before the dissolution.
Does dissolution change a corporation’s procedural requirements for voting, selection of its officers and directors, or amendment of its bylaws? (Q)
No. Dissolution does not change a corporation’s procedural requirements for voting, selection of its officers and directors, or amendment of its bylaws. The procedures that regulate these aspects of the corporation’s business remain the same as before the dissolution.
Does dissolution prevent the filing of legal proceedings against the corporation, or suspend any pending legal proceedings? (Q)
No. Dissolution does not prevent the filing of legal proceedings against the corporation, nor does it suspend any pending legal proceedings. Claimants may initiate proceedings on their claims after dissolution.
Does dissolution terminate the authority of a corporation’s registered agent? (Q)
No. Dissolution does not by itself terminate the authority of a corporation’s registered agent. The agency relationship remains the same as it was before the dissolution.
What is a voluntary dissolution? (Q)
A voluntary dissolution is a dissolution initiated by choice of the corporation’s incorporators, initial directors, or board of directors plus shareholders.
Is a corporation authorized to carry out any tasks after it is dissolved? (Q)
Yes. After a corporation is dissolved, it is not allowed to engage in ordinary business tasks, but it may still carry out tasks involving the winding up and liquidation of the corporation’s affairs. Permitted tasks include:
collecting assets,
discharging liabilities,
disposing of properties that will not be distributed to shareholders,
distributing any remaining property among shareholders, and
doing any other act necessary for winding up and liquidation.
If a corporation has not issued shares, or has not commenced doing business, may the corporation be dissolved by a majority of the incorporators or initial directors? (Q)
Yes. A corporation that has not issued shares, or has not commenced doing business, may be dissolved by a majority of the incorporators or initial directors. The incorporators or directors may dissolve the corporation by filing articles of dissolution with the secretary of state. The articles of dissolution must include a statement that the corporation has no unpaid debts, and that the net assets have been distributed to any shareholders.
May a corporation be voluntarily dissolved by agreement of the board of directors and the shareholders? (Q)
Yes. A corporation may be voluntarily dissolved by agreement of the board of directors and the shareholders. The board of directors must first adopt a resolution authorizing the dissolution. The board must then submit the proposal to the shareholders for a vote, along with either a recommendation for approval or an explanation of why the board does not recommend approval. If the shareholder vote is to take place at a meeting, notice of the meeting and the proposed dissolution must be provided to all shareholders, including those not entitled to vote. Alternatively, the vote may be taken in writing without a meeting. The required number of shareholder votes for approval may be established by:
the board of directors,
the articles of incorporation, or
the default quorum rules under the MBCA.
Must all shareholders approve a corporation’s voluntary dissolution? (Q)
No. Not all shareholders must approve a corporation’s voluntary dissolution. The corporation must notify all shareholders if a meeting is being proposed to consider dissolution. However, generally, at the meeting, only a quorum consisting of the majority of shareholders who are entitled to vote must be present for a vote to take place.
What are articles of dissolution? (Q)
Articles of dissolution are documents setting forth:
the name of the corporation,
the date on which dissolution was authorized, and
a statement reflecting shareholder approval, if required.
A corporation that is dissolving must file the articles of dissolution with the secretary of state or other appropriate authority. The dissolution is effective as of the date of the articles of dissolution.
May a corporation revoke a voluntary dissolution? (Q)
Yes. A corporation may revoke a voluntary dissolution within 120 days after the date of the dissolution. Revocation must be approved in the same way that the dissolution was approved, unless the dissolution authorization allows the board of directors to revoke the dissolution without shareholder approval. To revoke a dissolution, the corporation must file articles of revocation with the secretary of state, indicating the date and the process by which revocation was approved. A revocation relates back to the effective date of the articles of dissolution.
A corporation was involved in complicated patent-infringement litigation with a competitor, and a loss would mean the end of the corporation. The court ruled in the competitor’s favor. The corporation moved for the court to reconsider its decision but began the dissolution process. The board voted in favor of dissolution, and the shareholders followed suit at a properly noticed meeting. The board then filed the necessary dissolution paperwork with the state. One week after the dissolution became effective, the court reconsidered its ruling and ruled in the corporation’s favor.
May the directors now revoke the corporation’s dissolution? (Q)
Yes. The directors may now revoke the corporation’s dissolution. After a voluntary dissolution is authorized, the corporation must file a certificate or notice of dissolution with the state identifying the dissolution and its effective date. Even after this official action, a corporation may still revoke the dissolution within 120 days of the dissolution’s effective date.
Here, the corporation was validly dissolved. However, the court’s favorable ruling came only one week after the effective date of the dissolution. Because the corporation has 120 days from the effective date to revoke its dissolution, the board still has time to revoke the corporation’s dissolution.
What is an administrative dissolution of a corporation? (Q)
An administrative dissolution is a dissolution initiated by the secretary of state as a consequence of a corporation’s failure to comply with administrative regulations regarding corporations.
For what reasons may a state’s secretary of state administratively dissolve a corporation? (Q)
A state’s secretary of state may commence a proceeding to administratively dissolve the corporation if the corporation:
fails to pay required taxes, fees, or penalties;
fails to deliver its annual report in time;
does not have a registered agent or office;
fails to notify the secretary of state of a change to its registered agent or office; or
exceeds the period of duration specified in its articles of incorporation.
A corporation will be given an opportunity to correct any of these problems before the corporation is actually dissolved. Further, even after a corporation is administratively dissolved, it may apply for reinstatement within two years of the dissolution.
What is a judicial dissolution of a corporation? (Q)
Judicial dissolution is the dissolution of a corporation following a judicial procedure.
Under what circumstances may a state’s attorney general seek judicial dissolution of a corporation? (Q)
A state’s attorney general may seek judicial dissolution of a corporation if:
the corporation obtained its articles of incorporation by fraud or
the corporation has exceeded or abused its legal authority.
Under what circumstances may a shareholder seek judicial dissolution of a corporation? (Q)
A shareholder may seek judicial dissolution if:
the directors are deadlocked in managing the corporation, the shareholders cannot break the deadlock, and the deadlock either threatens irreparable harm to the corporation or prevents the conduct of the corporation’s business for the shareholders’ benefit;
the directors are acting in a manner that is illegal, oppressive, or fraudulent;
the shareholders are deadlocked in voting and have failed for at least two consecutive annual meetings to elect successors to directors whose terms have expired;
corporate assets are being misapplied or wasted; or
the corporation has abandoned its business but failed to liquidate and distribute its assets.
However, a shareholder may not seek dissolution of most publicly traded corporations, nor of corporations with at least 300 shareholders and at least $20,000,000 in market value.
There were six directors on a corporation’s board. The board had splintered into two factions of three directors each, and the two factions voted against each other on every proposal. Because of this deadlock, proposals could not garner the necessary majority vote to be approved. All corporate business had come to a halt, and the corporation was losing clients rapidly. The shareholders sought to break the deadlock, but the articles of incorporation allowed shareholders to approve proposals only by super-majority vote. No proposal could get the super-majority level of shareholder support.
May a shareholder have the corporation judicially dissolved? (Q)
Yes. A shareholder may have the corporation judicially dissolved. A shareholder may request and obtain the judicial dissolution of a corporation if:
the corporation’s directors are deadlocked (i.e., split into equal opposing factions);
the shareholders are unable to break the deadlock; and
either irreparable injury to the corporation is threatened or being suffered, or the business can no longer be conducted to benefit the shareholder because of the deadlock.
Here, the two factions of directors are deadlocked, having split into equal, opposing factions of three apiece. The shareholders are unable to garner the super-majority necessary to break the deadlock and approve any proposals. The deadlock has caused the corporation to lose clients and cease doing business, which will hurt the shareholders. Thus, a shareholder may have the corporation judicially dissolved.
May a creditor seek the judicial dissolution of a corporation? (Q)
Yes. A creditor may may seek judicial dissolution of a corporation if the creditor can establish that:
the creditor’s claim has been reduced to judgment, an execution on the judgment has been returned unsatisfied, and the corporation is insolvent; or
the corporation has admitted in writing that the creditor’s claim is due and owing, and the corporation is insolvent.
However, under no circumstances may a creditor seek judicial dissolution of a solvent corporation.
An investor agreed to lend a distressed corporation $50,000 on an unsecured basis. The corporation agreed to repay the money within 90 days. Unfortunately, the corporation was unable to pay the debt when due because it was facing a liquidity crisis that had prevented it from paying any of its bill for the prior two months. The corporation sent the investor an email acknowledging that it was unable to make a timely payment on the debt. The investor wanted to force the corporation to dissolve in hopes of getting the debt paid through selling off the corporation’s capital assets.
May the investor seek to have the corporation judicially dissolved? (Q)
Yes. The investor may ask to have the corporation judicially dissolved. A creditor may seek judicial dissolution of a corporation if the creditor can establish that:
the creditor’s claim has been reduced to judgment, an execution on the judgment has been returned unsatisfied, and the corporation is insolvent; or
the corporation has admitted in writing that the creditor’s claim is due and owing, and the corporation is insolvent.
Here, the investor’s $50,000 loan to the corporation makes the investor a creditor with a claim against the corporation. The corporation admitted in writing (i.e., by email) that the investor’s claim is due and unpaid. Finally, the corporation has been unable to pay its debts as they come due, meaning it is insolvent. Thus, the investor is entitled to seek a judicial dissolution of the corporation.
Under what circumstances may a corporation seek its own judicial dissolution? (Q)
A corporation may seek its own judicial dissolution by asking to have its voluntary dissolution continued under the supervision of the court.