I. ) – INVOLUNTARY BUSINESS DISSOLUTION
The process for an involuntary dissolution of a corporation is similar to the process used for an involuntary dissolution of a limited liability company in California.
Four Steps to Involuntary Dissolution
1. CHECK YOUR SHAREHOLDERS’ AGREEMENT Many corporate shareholders decide to plan for their future by entering into a Shareholders’ Agreement (aka a Buy/Sell Agreement) at the time of forming their business. (See our Article on Buy/Sell Agreements). Such an Agreement provides a pre-determined purchase price for liquidation of an owner’s stock, or a method of calculating the purchase price based on the changing financial statements of the company, in the event a shareholder chooses to retire, dies, or wants to liquidate his ownership interest for any other reason stated in the agreement. If your company has a Shareholders’ Agreement, check to see if it has language related to your situation. With a well written Shareholders’ Agreement, it will probably not be necessary to file an involuntary dissolution action as most shareholders’ disputes can be resolved with a buy out. Therefore, the remainder of this Article assumes your company does not have a Shareholders’ Agreement controlling the dispute.
2. NEGOTIATE SETTLEMENT When the relationship between shareholders deteriorates, and emotions escalate, it is best that one group purchases the other group’s stock because of the high costs of an involuntary dissolution action. However, if a buy-out cannot be negotiated, an involuntary dissolution action should be considered.
A shareholder filing an involuntary dissolution action seeks to encourage the other shareholders to purchase his shares, or to recover the value of his stock through the mechanism of the lawsuit. In such a lawsuit, the plaintiff also often adds claims for the removal of directors, breaches of fiduciary duty, and requests an accounting. But, in many cases, the corporation can avoid the dissolution from happening by purchasing the Plaintiff(s)’ stock ……..
*****BUY OUT RIGHTS: CAUTION:
In California, if the involuntary dissolution action is filed by shareholders representing 50% or less of the voting power of the corporation, the corporation can avoid the dissolution from occurring by purchasing the stock of those shareholders who filed the action!!! The purchase price is either agreed upon between the corporation and the plaintiff shareholders, or is set at a price determined by three Court appointed appraisers. AND if the corporation declines to purchase Plaintiff’s stock, then the holders of 50% or more of the voting power may purchase the stock.
Clearly the expense of three appraisers and a lawsuit for involuntary dissolution can be significant! Thus, a negotiated settlement is generally a superior outcome to litigation of the dissolution. FOR HELP IN NEGOTIATING A BUY-OUT, CALL ORANGE COUNTY BUSINESS LAWYER AT (844) 921-1937
3. FILING AN INVOLUNTARY DISSOLUTION ACTION – WHO CAN FILE? One-half of the directors, or shareholders owning at least one-third of the outstanding stock in a California corporation, are able to file an involuntary dissolution action. In order to win, they must be able to prove one of six statutory grounds. The most common of these grounds is either the controlling group has committed fraud, mismanagement, or abuse of authority; or there is deadlock among the shareholders. A variety of issues arise in these cases, and the Court is flexible in its remedies, including:
- Appointment of a provisional director to break deadlock among the Board of Directors;
- Appointment of a receiver to take over and manage the business of the corporation until trial, or to wind up the affairs of the corporation; or the Court may order the Board of Directors to wind up the corporation’s affairs, subject to supervision by the Court;
- Calculation of fair value of the Plaintiff’s stock, on the basis of liquidation value taking into account the possibility of sale of the entire business as a going concern; and
- Removal of a director for misconduct, neglect, or dishonesty in conducting the company’s winding up of its business.
4. WINDING UP THE BUSINESS The process of winding up the business of a dissolving entity is complicated. Notices must be prepared and delivered to Shareholders and to all known creditors and claimants; the validity and amount of claims against the corporation must be determined, negotiated, settled and paid; the rights of the shareholders to the assets of the entity must be resolved; accountings must be prepared, etc. YOU NEED AN ATTORNEY TO GUIDE YOU THROUGH THE MAZE OF LAW GOVERNING AN INVOLUNTARY DISSOLUTION.
CALL ORANGE COUNTY BUSINESS LAWYER FOR HELP NOW!!! (844) 921-1937
II. ) – VOLUNTARY BUSINESS DISSOLUTION
When it is right for you to close the doors to your business and cease operations, you need guidance through the dissolution process.
CALL ORANGE COUNTY BUSINESS LAWYER at (844) 921-1937
Six Steps to voluntarily Dissolve Your Business Entity
1. OWNER APPROVAL The owners of the company must approve a voluntary dissolution of a business entity. If your business is a corporation, the Board of Directors must approve a resolution to dissolve the company, and then at least fifty percent (50%) of the outstanding shares in the corporation must vote to approve the action. If your business is a limited liability company (an “LLC”), the members must approve of the dissolution. Following this election, the corporation must file documents with the Secretary of State to complete the dissolution.
2. FILE THE ELECTION TO WIND UP AND DISSOLVE AND THE CERTIFICATE OF DISSOLUTION WITH THE SECRETARY OF STATE After the corporation’s shareholders, or the limited liability company’s members, have voted to approve the dissolution, an Election to Wind Up and Dissolve, and a Certificate of Dissolution must be filed with the Secretary of State in the state in which the business was formed. If the company is also qualified to do business in other states, dissolution paperwork must be filed in those states too.
3. NOTIFY CREDITORS Creditors of the closing business entity must be notified by mail of the dissolution. The notification to creditors must state:
- The corporation (or limited liability company) has been dissolved or has filed the statement of
intent to dissolve;
- The mailing address to which creditors must send their claims;
- A list of the information to be included in a creditor’s claim;
- The deadline for submitting claims; and
- A statement that claims will be barred if not received by the deadline.
4. SETTLING CREDITORS’ CLAIMS A creditor’s claim may be accepted or rejected by your company. An accepted claim can potentially be negotiated with the creditor if they will accept payment for less than the full amount due, or it can be paid in full. If a claim is rejected, the dissolving entity must advise the creditor in writing of the rejection.
5. FILING FEDERAL, STATE AND LOCAL TAX RETURNS To formalize the closing of you business with the federal, state and local taxing authorities, you must file your final tax returns.
For example, California Revenue and Taxation Code Division 2, Part 10.2 requires a final franchise tax return, as described by California Revenue and Taxation Code Section 23332 be filed with the California Franchise Tax Board.
6. DISTRIBUTION OF ASSETS After paying the creditors’ claims, the company’s remaining assets are distributed to the owners in proportion to their ownership interests in the company. If your corporation has more than one class of stock, the Bylaws should describe the amounts to be distributed to the different shareholder classes.
NOTE: Dissolution documents cannot be filed on behalf of a corporation or limited liability company that has been suspended by the California Franchise Tax Board. See California Revenue and Taxation Code Sections 23301, 23301.5, and 23775.
BE SURE TO HAVE ORANGE COUNTY BUSINESS LAWYER ASSIST YOU WITH THE VOLUNTARY DISSOLUTION PROCESS.
CALL NOW!!! (844) 921-1937
Anxious? Need Legal Help? Call Attorney Grimaila Today…
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