The Law of Corporations and Other Business Organizations

Lecture Notes

Voluntary Dissolution

1. Corporations are given their life by state
statute, and they must be dissolved according
to state statute.
2. Most corporations exist perpetually and
must be dissolved when there is no further
reason for their existence.
3. In addition to dissolving the corporation
in its state of domicile, a dissolving corporation
must surrender its certificate of
authority in every state in which it is
qualified to do business as a foreign corporation.
4. Voluntary dissolutions are approved by
the directors and shareholders of the corporation.
5. The voluntary dissolution of a corporation
may be approved by the board of directors
if no stock was ever issued. After
shares of stock of the corporation have
been issued, dissolution must be approved
by at least a majority of the corporation’s
shareholders.
6. Courts may prohibit dissolutions that are
aimed at freezing out the minority shareholders
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 typically
followed by the dissolving corporation
include the following:
• Obtaining approval for the dissolution
from the directors and shareholders
of the corporation
• Filing the articles of dissolution or
other appropriate document with the
proper state authority
• Liquidating the assets of the corporation
• Paying the creditors’ claims
• Distributing the balance of the corporation’s
assets to the shareholders
Articles of Dissolution and Notice of Intent
to Dissolve
9. In some states, the corporation is dissolved
by filing articles of dissolution or
a certificate of dissolution with the secretary
of state.
10. In some states, the corporation first files
a notice (or statement) of intent to dissolve
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 articles
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 following
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 corporation
• 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 fewer
than 120 days from the effective
date of the written notice, by which
the dissolved corporation must receive
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 statute
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 after
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 corporation
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.
Revocation of Dissolution
22. The statutes of most states provide that
the dissolution process may be revoked
with the approval of the board of directors
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 corporation
is dissolved by its state of domicile,
usually for failure to pay taxes or
file annual reports.
24. When a corporation that has been administratively
dissolved rectifies the situation
that caused the dissolution, it is usually
reinstated.
25. Corporations may be dissolved involuntarily
by a court action brought by creditors
or shareholders.
26. Creditors with a judgment against a corporation
that does not have sufficient liquid
assets to pay them may bring a judicial
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 proceedings
brought by minority shareholders:
(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 acted
illegally, oppressively, or fraudulently;
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 often
go hand in hand.
29. Federal bankruptcy courts have jurisdiction
over all bankruptcies.
30. A corporation filing bankruptcy proceedings
may petition for a liquidation bankruptcy
under Chapter 7 of the Bankruptcy
Code, or it may seek a reorganization under
Chapter 11.
31. Chapter 11 of the Bankruptcy Code allows
companies that are in serious financial
trouble to reorganize their businesses
without liquidating. Chapter 11 provides
a rehabilitative procedure for corporations
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 limitations
of postdissolution claims.
Cause of Action: Negligence and strict liability
Facts: In 1960, Hunter-Hayes installed an elevator
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 negligent
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 dissolution,
under the “trust fund theory.” The other
defendants filed cross-actions against the
shareholders, seeking contribution and indemnity.
Issue: Are the shareholders of a dissolved
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 corporate
officers and directors, so long as the assets
are traceable and have not been acquired
by a bona fide purchaser. The extension of the
trust fund theory to cover plaintiff’s claim
would mean that the corporation could never
completely dissolve, but would live on indefinitely
through its shareholders.