978-1133019145 Chapter 14 Solution Manual

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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

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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.

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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

CHAPTER 14 Corporate Dissolution 101

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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

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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