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The legal structuring of a dissolution includes the formal set of legal agreements, company approvals, and filings to formally end a company’s legal existence.
The available structures generally depend on the jurisdiction in which the company was incorporated.
Most early-stage startups incorporated in Delaware follow one of three dissolution structures which are outlined below:
If a company has creditors, it may pursue a legal process designed to protect creditor rights such as a long form dissolution or separately undertaking an ABC or bankruptcy in connection with a given dissolution structure.
However, for most early-stage startups, pursuing a dissolution structure offers a more economical and efficient path.
The legal structuring of a dissolution includes the formal set of legal agreements, company approvals, and filings to formally end a company’s legal existence.
Administrative dissolution is imposed by the Delaware secretary of state on any Delaware corporation that fails to maintain good standing.
To maintain good standing, a company must meet certain statutory requirements, such as:
Companies pursuing an administrative dissolution do not file a certificate of dissolution and therefore do not receive formal documentation from the state reflecting the dissolution. Instead, the “dissolution” simply occurs as a matter of course by the Delaware secretary of state.
Under statute, once administratively dissolved the company is prohibited from partaking in any activities aside from liquidating assets, if applicable, and winding down affairs. Failure to comply with this restriction may lead to personal legal liability and penalties for the company and its directors.
While not required, companies planning to administratively dissolve may wish to authorize the dissolution and adopt a plan of dissolution (both activities are detailed further below in this article).
The primary advantage of an administrative dissolution in Delaware is that it requires no additional filings and does not require that the company become current on past Delaware franchise fees.
That said, unless a company has de minimis (zero or negligible) liabilities and assets and has ceased or never begun business operations, it is generally not recommended to dissolve via administrative dissolution. Creditors and investors often prefer - and sometimes require - formal notice and documentation of a company’s dissolution.
Short form dissolution is one of two statutory dissolution options in Delaware - the second option is “long form dissolution”. This option under section 281(b) of the General Corporation Law of the State of Delaware is a dissolution structure that is often used by startups.
Companies pursuing a short form dissolution must have a majority of shareholders approve the plan of dissolution.
A key advantage of short form dissolution is that it results in formal documentation of the company’s dissolution via a filed certificate of dissolution.
However, unlike long form dissolution, this process has less rigid requirements around creditor notices and claims filings. As a result, short form dissolution generally is more expedient than long form dissolution, but its process may not as exhaustively uncover unknown creditors or protect against future claims from creditors.
Section 281(b) of the General Corporation Law of the State of Delaware provides the option for a company to adopt a plan of dissolution (often referred to as a “plan of liquidation and dissolution”) - this section corresponds to the short form dissolution structure.
A plan of dissolution is a written outline of how a business entity plans to wind down and end its legal existence. The plan details the company’s wind-down activities with a key focus on its planned actions to meet creditor claims and obligations.
Long form dissolution is the second of the two statutory dissolution options in Delaware. This option under Section 280 of the General Corporation Law of the State of Delaware is a less commonly used process in Delaware.
Long form dissolution is designed to protect creditors’ rights, and, by extension, company directors against potential personal liability from unknown creditors. In these ways, long form dissolution serves similar goals as the ABC and bankruptcy processes.
Companies pursuing a long form dissolution must follow the creditor notices and claims filings requirements specified in Section 280 of the DGCL. At a high-level, these include formal notice to creditors, publicly published notices, a bar date, and a court approval process.
Like with short form dissolution, companies pursuing long form dissolution must obtain formal authorization to dissolve.
Few early-stage startups pursue long form dissolution due to the costs of facilitating a creditor notice and claims filing process that extends over several months. However, a key benefit of long form dissolution is the reduced liability exposure for company directors. Given the comprehensive process to notify potential claimants, company directors in long form dissolution better safeguard against personal liability in the event that they distribute the assets of a dissolved company and unknown creditors later seek recourse.
The dissolution of a company must follow the legal steps required by the state in which the company is incorporated.
In Delaware, one of the required steps is to receive dissolution authorization from a combination of the company’s board of directors and shareholders.
There are two ways to receive authorization to dissolve a company in Delaware:
Section 275 of the DGCL provides further guidance regarding the process to authorize a company’s dissolution.
As a service to companies incorporated in Delaware, the Delaware secretary of state provides several template forms for dissolutions. Most law firms will provide template forms as well.
These forms are used to file for a certificate of dissolution and have associated filing fees.
Unintuitively, the short form dissolution process is separate from the similarly-named short form certificate of dissolution template that the Delaware secretary of state provides and which allows for a reduced filing fee.
The short form certificate of dissolution process is an inexpensive ($10.00 fee) filing option available to companies that can attest that they:
The short form certificate of dissolution is available to qualified companies that pursue either the short form or long form dissolution process - though as a practical matter, companies undertaking the long form dissolution process will usually have non-zero assets and won’t be eligible for the reduced filing fee.
Under Delaware law, a company continues to legally exist for at least three years after its dissolution (either after its imposed administrative dissolution or filed certificate of dissolution). During this period, the company can complete activities related to the wind-down process. Key activities after dissolution generally may include:
Importantly, the company cannot continue business operations during the period following dissolution.