Under Connecticut law, there are various methods attorneys may use to dissolve or terminate a corporation. It is referred to as dissolution of the corporation. A dissolved corporation continues its corporate shell existence but stops carrying on business except where necessary to wind up the affairs of the company. Winding up typically involves liquidation by collecting assets, disbursing assets, selling of assets and property, and discharging liabilities.
Corporate dissolution is governed by Connecticut General Statutes Chapter Title 33, Chapter 601, Part XIV. Dissolution can be accomplished by any of the following:
- Dissolution by the original incorporators or directors under Connecticut General – voluntary
- Dissolution by the board of directors and shareholders – voluntary
- Dissolution by the Secretary of State – administrative
- Dissolution by a shareholder proceeding in court – judicial
- Dissolution by a creditor proceeding in court – judicial
- Dissolution by a company proceeding in court – judicial
The first two methods are known as voluntary dissolution. Typically, this means the company directors propose dissolution to the shareholders of the company. The board typically notifies the shareholders of a meeting to address dissolution. If the proposal passes, a certificate of dissolution is filed with the Secretary of State. A company may elect to revoke the dissolution with 120 days by following the same procedure. A company may have a transaction or business law attorney assist with the necessary documents and voting records. The company may then proceed with winding up the affairs of the company which requires following the statutory requirements for effective dissolution.
Administrative dissolution typically occurs when the company has failed to maintain a registered agent or to file required reports with the Secretary of State. For example, if the company fails to file an annual report for more than one year, the Secretary of State may take action and send notice to the company of the deficiency and potential for dissolution. If there is no response or the deficiencies are not fixed, the Secretary of State of Connecticut may then prepare and file a certificate of dissolution. Although these forms can be maintained without an attorney, some clients prefer to have a business attorney file the required reports.
Judicial dissolution is started with a lawsuit in court and typically involves litigation attorneys representing the shareholder or shareholders and the company. Although an individual shareholder can bring an action in court by himself or herself (referred to as “pro se”), shareholders tend to hire attorneys based on the complexity of the proceeding. Under court rules, the company must have an attorney.
The form of a judicial dissolution lawsuit is varied, but typically you have either a deadlock with management or a disgruntled or oppressed shareholder. A deadlock occurs in cases of 50/50 control of a company and two groups of shareholders or directors are deadlocked in the management of corporate affairs. The oppressed shareholder claims are based on a claim of unfairness with respect to ownership of shares in the company. These cases are sometimes referred to as shareholder oppression actions, freeze out actions, or squeeze out actions. These terms refer to a claim based on minority shareholder rights as the cases are brought by minority shareholders.
Connecticut General Statutes section 33-896 sets forth that a superior court judge may order dissolution when a shareholder brings an action and can prove 1) that there is a deadlock in management or an inability to elect directors; 2) there is shareholder oppression; or 3) the corporate assets are being wasted. Seems simple enough. However, there are complexities to these claims and the parties typically vigorously defend their positions. Experts are often needed for damages, accounting, and forensics. Many times, shareholder oppression actions end up on Connecticut’s complex litigation docket. On this docket, the parties, attorneys, and litigants are subject to a specific set of procedural rules and the case is assigned to one judge for the length of the case.
This post is only an outline of typical examples and there are many details to each aspect of the statutory framework for dissolution. Before seeking dissolution, shareholders should consider consulting an attorney. Regardless of involving a lawyer, a shareholder may want to become familiar with the statutory framework for dissolution, the by-laws of the company, shareholder agreements, and the certificate of incorporation. In a later post, I will go through some of the various types of judicial dissolution actions including oppression claims and the applicable defenses.