978-1133019145 Chapter 14 Solution Manual

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subject Authors Angela Schneeman

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©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
CHAPTER 14
Corporate Dissolution
THEME
Chapter 14 introduces students to corporate dis-
solution by focusing on the nature and definition
of corporate dissolution and the procedures for
voluntary and involuntary dissolution.
CHAPTER GOAL
The goal of this chapter is for students to be-
come familiar with the following terms and
topics concerning corporate dissolutions:
Dissolution and winding up as they relate
to corporations
Procedures followed for voluntary corpo-
rate dissolutions, including obtaining the
proper authorization from the shareholders
of the corporation
Involuntary and administrative dissolutions
Notices of dissolution that may be re-
quired under various state statutes
The role of corporate paralegals assisting
with corporate dissolutions
Resources available to corporate parale-
gals who may be assisting with corporate
dissolutions
SUGGESTED APPROACH
State statutory requirements for dissolving
corporations vary greatly. After an introduc-
tion to the nature of corporate dissolutions,
students should become familiar with the stat-
utory procedures in their home states for dis-
solving a corporation.
LECTURE NOTES
Voluntary Dissolution
1. Corporations are given their life by state
statute, and they must be dissolved ac-
cording to state statute.
2. Most corporations exist perpetually and
must be dissolved when there is no fur-
ther reason for their existence.
3. In addition to dissolving the corporation
in its state of domicile, a dissolving cor-
poration must surrender its certificate of
authority in every state in which it is
qualified to do business as a foreign cor-
poration.
4. Voluntary dissolutions are approved by
the directors and shareholders of the cor-
poration.
5. The voluntary dissolution of a corpora-
tion may be approved by the board of di-
rectors if no stock was ever issued. After
shares of stock of the corporation have
been issued, dissolution must be ap-
proved by at least a majority of the cor-
poration’s shareholders.
6. Courts may prohibit dissolutions that are
aimed at freezing out the minority share-
holders of the corporation if the board of
directors and majority shareholders are
not acting in good faith.
7. Procedures for dissolving corporations
are established by state statute, and vary
from state to state.
8. Voluntary dissolution procedures typical-
ly followed by the dissolving corporation
include the following:
Obtaining approval for the dissolu-
tion from the directors and sharehold-
ers of the corporation
Filing the articles of dissolution or
other appropriate document with the
proper state authority
Liquidating the assets of the corpora-
tion
Paying the creditors’ claims
Distributing the balance of the corpora-
tion’s assets to the shareholders
CHAPTER 14 Corporate Dissolution 99
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Articles of Dissolution and Notice of Intent
to Dissolve
9. In some states, the corporation is dis-
solved by filing articles of dissolution or
a certificate of dissolution with the secre-
tary of state.
10. In some states, the corporation first files
a notice (or statement) of intent to dis-
solve with the secretary of state and then
files articles of dissolution at a later date.
Winding Up and Liquidation
11. After a dissolving corporation has filed
either its notice of dissolution (in states
that require such a document) or its arti-
cles of dissolution with the secretary of
state, it begins the process of winding up
its affairs and liquidating its assets.
12. Section 14.05 of the Model Business
Corporation Act (MBCA) lists the fol-
lowing activities that may be appropriate
to wind up the affairs of a corporation
and liquidate its business:
Collection of assets
Disposition of properties that will not
be distributed in kind to shareholders
Discharge or making provision for
discharge of liabilities of the corpora-
tion
Distribution of remaining property
among shareholders according to
their interests
Every other act necessary to wind up
and liquidate the business and affairs
of the corporation
13. All state statutes provide procedures for
notifying a corporation’s creditors of its
dissolution.
14. Corporations domiciled in states following
the MBCA are given guidelines to follow
for notifying creditors of known claims
and for notifying the public in the event
that there are any unknown claims against
the corporation.
15. Notice sent to the known claimants of a
dissolving corporation must include the
following information:
A description of the information that
must be included in a claim
A mailing address to which the claim
may be sent
The deadline, which may not be few-
er than 120 days from the effective
date of the written notice, by which
the dissolved corporation must re-
ceive the claim
A statement that the claim will be
barred if not received by the deadline
16. Under the MBCA, creditors who receive
proper notice but do not make a claim in
accordance with the notice and state stat-
ute will have their claims barred.
17. Claims are also barred if they are rejected
by the corporation and the claimant does
not commence a proceeding to enforce
the claim within 90 days of the rejection.
18. The statutes of states that follow the
MBCA in this regard provide procedures
for publishing notice of dissolution for
unknown claims against the corporation
of which the corporation’s principals are
unaware at the time of dissolution.
19. When corporations follow the procedure
in the MBCA for publishing notice, all
claims against the corporation will be
barred unless a proceeding to enforce a
claim is commenced within five years af-
ter the date of publication.
20. Shareholders may be liable for valid
claims made after the dissolution of a
corporation, but only to the extent of the
distribution they received when the cor-
poration was dissolved.
21. Dissolving corporations must notify the
Internal Revenue Service by filing a
Form 966, together with a certified copy
of the resolution or plan of liquidation.
100 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Revocation of Dissolution
22. The statutes of most states provide that
the dissolution process may be revoked
with the approval of the board of direc-
tors and shareholders by filing articles of
revocation or a similar document with the
secretary of state or the state authority
that accepted the articles of dissolution
for filing.
Involuntary Dissolution
23. In an administrative dissolution, the cor-
poration is dissolved by its state of domi-
cile, usually for failure to pay taxes or
file annual reports.
24. When a corporation that has been admin-
istratively dissolved rectifies the situation
that caused the dissolution, it is usually
reinstated.
25. Corporations may be dissolved involun-
tarily by a court action brought by credi-
tors or shareholders.
26. Creditors with a judgment against a cor-
poration that does not have sufficient liq-
uid assets to pay them may bring a judi-
cial action to force the dissolution of the
corporation and liquidation of its assets
in order to collect on their judgments.
27. Courts may dissolve corporations in pro-
ceedings brought by minority sharehold-
ers: (a) when the directors or majority
shareholders are acting in a manner that
is threatening irreparable injury to the
corporation; (b) if the directors have act-
ed illegally, oppressively, or fraudulent-
ly; or, (c) if the corporate assets are being
misapplied or wasted.
Corporate Dissolution and Bankruptcies
28. Corporate dissolutions are not necessarily
due to the bankruptcy or failure of the
corporation, and corporate bankruptcies
do not necessarily mean the dissolution
of the corporation. However, the two of-
ten go hand in hand.
29. Federal bankruptcy courts have jurisdic-
tion over all bankruptcies.
30. A corporation filing bankruptcy proceed-
ings may petition for a liquidation bank-
ruptcy under Chapter 7 of the Bankruptcy
Code, or it may seek a reorganization un-
der Chapter 11.
31. Chapter 11 of the Bankruptcy Code al-
lows companies that are in serious finan-
cial trouble to reorganize their businesses
without liquidating. Chapter 11 provides
a rehabilitative procedure for corpora-
tions to retain their assets, restructure
their debt, and repay obligations over an
extended period of time.
The Paralegal’s Role
32. Paralegals often assist with all aspects of
the corporate dissolution.
CASE BRIEFS
Hunter v. Forth Worth Capital Corporation,
620 S.W.3d 547, 20 ALR4th 399 (Tex. 1981)
Purpose: This case demonstrates the limita-
tions of postdissolution claims.
Cause of Action: Negligence and strict liabil-
ity
Facts: In 1960, Hunter-Hayes installed an el-
evator in a building under construction in
Forth Worth, Texas. The company inspected
and serviced the elevator until February 1964.
The corporation was dissolved on March 11,
1964.
On May 13, 1975, Theodore Moeller was
permanently injured when the elevator fell on
him. He sued the former shareholders of
Hunter-Hayes and others to recover damages
for his personal injuries. Moeller alleged his
injuries were proximately caused by the negli-
gent installation, inspection, and maintenance
of the elevator by Hunter-Hayes and that the
shareholders were personally liable to him to
the extent of the assets they received on disso-
lution, under the “trust fund theory.” The other
defendants filed cross-actions against the
page-pf4
CHAPTER 14 Corporate Dissolution 101
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
corporation personally liable to the extent of
their distributions from the corporation for
negligence by the corporation 11 years prior
under the trust fund theory?
Holding: No
Reasoning: The trust fund theory applies
whenever the assets of a dissolved corporation
are held by any third party, including corpo-
the new corporation. Before shares of
stock are actually issued, the five inves-
tors decide to form a limited liability
company instead. Bob has taken on re-
sponsibility for dissolving the corpora-
tion. Who must approve the dissolution?
Pursuant to § 1401 of the Model Busi-
ness Corporation Act, dissolution of a
corporation that has not issued shares
of stock may be by a majority of the
incorporations or directors, if directors
What if shares of stock had been issued?
If shares of stock have been issued, the
dissolution of the corporation must be
approved by the shareholders of the
corporation. Pursuant to § 14.02 of the
2. What are the duties of the individual or
individuals who are responsible for wind-
ing up the affairs of a dissolving corpora-
tion?
Individuals responsible for winding up
the affairs of a dissolving corporation
are responsible for the following:
3. In states following the MBCA, what doc-
umentation must be filed with the secre-
tary of state to dissolve the corporation?
4. Does the corporate existence dissolve
upon the filing of the articles of dissolu-
tion in states following the MBCA?
If not, for what purpose(s) is the corpo-
rate existence extended?
tion must be given to the creditors of a
corporation?
If a dissolving corporation gives notice,
it must give written notice to all known
creditors and claimants that describes
the information that must be included
page-pf5
102 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
in a claim, provides a mailing address
where a claim may be sent, gives the
6. What possible recourse does a minority
shareholder have when the corporate
management is deadlocked?
The minority shareholder may bring a
suit for involuntary dissolution or for a
the debts of the corporation incurred pri-
or to dissolution?
8. Suppose that the ABC Corporation is
administratively dissolved on January 1,
2012, for failure to file annual reports in
compliance with the statutes of its state
of domicile. On June 30, 2012, the ABC
Corporation eliminates the grounds for its
dissolution to the satisfaction of the sec-
retary of state and becomes reinstated.
Could the shareholders of the ABC Cor-
poration be held personally liable for ob-
ligations incurred on behalf of the corpo-
ration on March 15, 2012, on the grounds
that the corporation did not legally exist?
No, the administratively dissolved cor-
poration’s reinstatement would date
9. In a state following the MBCA, can a
creditor of a dissolved corporation who
10. Name three grounds for administrative
dissolution in states following the
MCBA.
1. The corporation does not pay fran-
chise taxes or penalties prescribed
by law.
Also
4. The corporation does not notify the
SUGGESTED ANSWERS TO
PRACTICAL PROBLEMS
The Practical Problems in this chapter ask stu-
dents to locate the statute sections within the
business corporation act of their home state to
answer some basic questions concerning the
requirements for dissolving corporations. Stu-
dents will need to determine what documents
must be filed in their home state to dissolve a
corporation and what information is required
by those documents. In addition, students are
asked to answer questions concerning giving
notice to known and unknown creditors in
their home state.
CHAPTER 14 Corporate Dissolution 103
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Resources for answering the Practical
Problems include state statutes, which may be
accessed through the CourseMate website that
accompanies this text at
http://www.cengagebrain.com. Exhibit 14-1 to
the text is a list of state statute citations for stat-
utes concerning corporate dissolution.
EXERCISE IN CRITICAL
THINKING
The Exercise in Critical Thinking for this
chapter asks students to consider the ramifica-
tions of postdissolution claims.
Exercise:
Postdissolution claims may be al-
lowed against the shareholders of a
corporation—sometimes several
years after they receive their final
distribution from the corporation.
Why do you think the courts allow
this? What might shareholders of a
dissolving corporation do to protect
themselves from postdissolution
claims?
SUGGESTIONS AND SAMPLE
DOCUMENTS FOR THE WORK-
PLACE SCENARIO
The Workplace Scenario at the end of this
chapter asks students to prepare sample doc-
uments to dissolve their fictitious corporation,
Cutting Edge Computer Repair, Inc. In addi-
tion, students are asked to prepare a sample
cover letter with the appropriate filing fee.
The documents prepared by the students will,
of course, depend on the requirements in their
home state. In some states, both a notice of
intent to dissolve and articles of dissolution
will be required. In others, only the articles of
dissolution will be required. Articles of disso-
lution, as well as notices or statements of in-
tent to dissolve for those states that require
them, are available for downloading in most
states from the secretary of state’s website.
Students can also create their own form, based
on the forms within the text and the statutes of
their home state.
Appendix N includes sample articles
of dissolution that could be filed in states that
follow the MBCA in this regard, as well as a
cover letter for filing the documents. A sample
notice of intent to dissolve is also included.

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