To dissolve a Delaware C corporation after selling its assets in an M&A deal, the board adopts a resolution recommending dissolution, the stockholders approve it, the company brings its Delaware franchise taxes and annual reports current, and it files a Certificate of Dissolution with the Delaware Secretary of State. Filing the certificate does not end the company’s obligations: the corporation then winds up its affairs, pays or provides for its liabilities, and only after that distributes what is left to stockholders.
Many founders assume that once the asset sale closes, the old company can simply be shut down. In practice, the seller entity often still holds sale proceeds, has obligations under the asset purchase agreement, and owes taxes, employees and vendors. Getting the order of steps right matters, because directors who distribute money to stockholders without properly providing for creditors can face personal exposure. Below is an overview of the typical process.
Before You Dissolve: Check the Asset Purchase Agreement
The sale of all or substantially all of a Delaware corporation’s assets generally requires board approval and approval by a majority of the outstanding voting stock under Section 271 of the Delaware General Corporation Law (DGCL), along with any class or series votes required by the charter or investor agreements. That approval is usually obtained before the asset sale closes, and the dissolution approval is sometimes obtained at the same time.
Before winding down, review the asset purchase agreement for provisions that affect timing, including:
- Indemnification obligations and survival periods for representations and warranties
- Escrows, holdbacks or earnouts that will be paid to the seller after closing
- Covenants requiring the seller to remain in existence, maintain a minimum amount of cash, or not distribute proceeds for a period of time
- Obligations to deliver further assignments, consents or transition services
If the buyer may still make indemnification claims, the seller generally must account for those potential claims before distributing proceeds. For more on deal structure, see our mergers and acquisitions practice page.
Step 1: Board Resolution
Under DGCL Section 275, the board adopts a resolution declaring that dissolution is advisable and recommending it to stockholders. Many companies also adopt a plan of dissolution or plan of liquidation that describes how the company will wind up, pay creditors and make distributions.
Step 2: Stockholder Approval
Dissolution must then be approved by holders of a majority of the outstanding stock entitled to vote, either at a meeting with proper notice or by written consent if the charter permits it. If approval is obtained by written consent of less than all stockholders, prompt notice must be given to the stockholders who did not consent. Delaware also allows dissolution without board action if all stockholders entitled to vote consent in writing. Check the charter and any voting or investor rights agreements for separate preferred stock votes.
Step 3: Bring Delaware Filings and Taxes Current
Delaware will not accept a Certificate of Dissolution until the company has paid its franchise taxes and filed its annual reports. Companies often discover unpaid franchise taxes from prior years at this stage, so calculate and pay the amount owed early in the process. If the company is registered to do business in other states, such as California, it will also need to withdraw or surrender that registration and file final state returns.
Step 4: File the Certificate of Dissolution
Once the dissolution is authorized and taxes are current, the company files a Certificate of Dissolution with the Delaware Secretary of State. Dissolution is effective on filing or at a later date stated in the certificate. The certificate is the start of the winding-up period, not the end of the process.
Step 5: Wind Up and Address Creditor Claims
Under DGCL Section 278, a dissolved corporation continues to exist for at least three years (or longer if a court directs) to prosecute and defend lawsuits, settle its affairs, dispose of property, discharge liabilities and distribute remaining assets. It may not continue the business for which it was organized.
Delaware offers two main paths for handling claims:
- The notice procedure (Sections 280 and 281(a)). The company gives formal written notice to known claimants, publishes notice, and petitions the Court of Chancery to determine the security required for contested, contingent and unknown claims. This path is more formal but offers stronger protection for directors and stockholders.
- The plan of distribution (Section 281(b)). The company adopts a plan to pay or make reasonable provision for all claims and obligations, including contingent claims and claims likely to arise within ten years, without going to court. Directors who comply generally are not personally liable to claimants.
Either way, the company should pay or reserve for all known debts, ongoing contracts, potential indemnification claims under the asset purchase agreement, and any tax liabilities before making liquidating distributions. Stockholders who receive distributions may have to return them, up to the amount received, if claims later go unpaid.
Step 6: Close Out Operations and Employees
Terminate or assign remaining leases and contracts, close bank accounts after final payments clear, cancel licenses and permits, and transfer domain names or other assets not already conveyed to the buyer. If the company had employees who did not move to the buyer, final wages and accrued vacation must be paid on time under applicable state law, and benefit plans must be terminated properly. Our article on how to let an employee go covers California final pay rules.
Step 7: File Final Tax Returns
The company should file final federal and state income tax returns and final payroll returns, and report liquidating distributions to stockholders as required. Federal rules require a corporation to file IRS Form 966 after adopting a resolution or plan to dissolve or liquidate. A sale of assets followed by a liquidation can produce tax at both the corporate level and the stockholder level, so work with a tax advisor early.
Step 8: Distribute Remaining Assets to Stockholders
Only after debts are paid or adequately provided for should the company distribute the remaining assets. Distributions follow the charter, not simply ownership percentages. If the company has preferred stock, liquidation preferences usually determine who gets paid first and how much. Review the capitalization table and the treatment of options, warrants and SAFEs under their governing documents before calculating amounts.
The Takeaway
Dissolving a Delaware C corporation after an asset sale is a sequence: approvals, Delaware filings, winding up, creditor protection and then distributions. The most common mistakes are distributing sale proceeds too early, overlooking obligations under the asset purchase agreement and ignoring preferred stock liquidation preferences.
Frequently Asked Questions
Can I dissolve the company right after the asset sale closes?
You can often file soon after closing, but first confirm that the asset purchase agreement does not require the seller to stay in existence or hold back funds for indemnification. Even after filing, the company continues to exist for winding up and must provide for its liabilities before distributing proceeds.
Who has to approve dissolving a Delaware corporation?
Generally the board must adopt a resolution recommending dissolution, and holders of a majority of the outstanding voting stock must approve it. The charter or investor agreements may require separate preferred stock votes. Delaware also permits dissolution by unanimous written consent of the stockholders entitled to vote.
What happens to the company after the Certificate of Dissolution is filed?
The corporation continues to exist for at least three years to wind up its affairs, defend or bring lawsuits, pay or provide for its liabilities and distribute remaining assets. It cannot continue operating its business during that period.
Can stockholders be liable after dissolution?
Stockholders who receive liquidating distributions may have to return some or all of what they received if valid claims go unpaid, generally limited to the amount distributed to them. Following Delaware’s claims procedures helps limit this exposure for both stockholders and directors.
How Sutter Law Can Help
Sutter Law advises founders and boards on asset sales, wind-downs and dissolutions as part of our startup law practice. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
