Richards Layton & Finger
 

Delaware's Long-Form Dissolution Statute: An Underutilized Alternative

September 1, 2015

Many companies are “too broke to go bankrupt.” As the “ABI Commission to Study the Reform of Chapter 11” notes, “anecdotal evidence suggests that Chapter 11 has become too expensive (particularly for small and medium size enterprises),” and more companies are liquidating without attempting to reorganize under federal bankruptcy laws. Those companies often seek alternatives to Chapter 11. Some of those alternatives are well understood, such as Chapter 7 of the Bankruptcy Code and, in some states, an assignment for benefit of creditors or “ABC.”

One alternative that is often overlooked is a “long-form” dissolution under Delaware’s General Corporation Law (“DGCL”). The long-form dissolution statute, enacted in 1987, is designed to solve the dilemma of potential personal liability that directors faced under common law and under dissolution statutes in other jurisdictions if they distribute all of the assets of a dissolved corporation and it later turns out that unknown creditors existed. As described in more detail below, this process, which involves proceedings in the renowned Delaware Court of Chancery, addresses this concern while arguably providing the most protection to directors who faithfully carry out the process of any bankruptcy alternative. At the same time, it provides creditors with notice and an opportunity to present their claims.

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