Reed Smith Client Alerts

The Delaware Court of Chancery recently granted a petitioner’s motion for an interim distribution of a portion of its remaining cash—set aside as security in judicial dissolution proceedings—and rejected an objector’s argument that the petitioner must hold all of its cash in reserve to cover the objector’s potential recovery in lawsuits against petitioner.

There are two ways to dissolve a Delaware corporation: through “elective” or “default” dissolution procedures. First, through elective dissolution, also referred to as “judicial” dissolution, a Delaware corporation must petition the Court of Chancery for approval of the security set aside, and provide notice of dissolution to potential claimants.1 Alternatively, through default dissolution, also referred to as “extrajudicial” dissolution, a Delaware corporation does not petition the court for review of its plan and security. Instead, Section 281(b) of the Delaware General Corporation Law provides a default procedure whereby the corporation must adopt a plan of distribution through which, among other things, the corporation “shall make such provision as will be reasonably likely to be sufficient to provide compensation” for pending and future claims.2

Under either the default or elective dissolution, there is a potential risk of director liability if procedures are not complied with.3 One way to limit potential director liability is to follow the elective, as opposed to default, procedures. Directors choosing to follow the elective procedure will receive the court’s stamp of approval through its determination of adequate security, thereby insulating directors from some future claims. Directors who have chosen the default dissolution procedure will remain subject to potential future claims, such as claims they have not adequately complied with Section 281(b)’s requirement of “reasonableness.” Accordingly, following the default rules for dissolution of a Delaware corporation is more risky, regardless of corporate directors’ good faith and due care.4

The Court of Chancery recently discussed dissolution procedures under Delaware law in In re Swisher Hygiene, Inc., 2020 WL 3125415 (Del. Ch. June 12, 2020). The petitioner, Swisher Hygiene, Inc. (Swisher), sold all of its assets and filed a certificate of dissolution, notified its potential creditors of the dissolution, and then filed a petition with the Court of Chancery under the judicial dissolution procedures set forth in 8 Del. C. Section 280.5 As a part of the petition to the court, Swisher sought a determination of an amount constituting sufficient security to cover wind-down costs, pending litigation, prospective claims, as well as any unknown or unripe claims.6