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Judicial Dissolution of a Corporation

This page deals with the situation when shareholders of a corporation are having a dispute that is so serious that the shareholders can no longer continue to operate the business together.

Connecticut law provides several methods for the dissolution of a corporation. These methods fall under three basic categories: (1) voluntary or consensual dissolution by the original incorporators, directors, or shareholders, (2) administrative dissolution by the Secretary of State, (3) and judicial or court-ordered dissolution, the subject of this page. Conn. Gen. Stat. § 33-880.

Grounds for Judicial Dissolution

In a dissolution case commenced by a shareholder, the Court may dissolve a corporation if the shareholder proves either deadlock, oppression, failure to elect directors, misappropriation or waste of assets. Conn. Gen. Stat. § 33-896(a)(1).


Deadlock

When disagreements among directors and shareholders cannot be resolved through compromise and management of the corporation is at a standstill as a result.

Proving Deadlock in Court

Deadlock can be proven when all of the following are true:
  1. Directors are deadlocked.

  2. Shareholders are unable to break the deadlock.

  3. “[I]rreparable injury to the corporation is threatened or being suffered or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock[.]” Conn. Gen. Stat. § 33-896(a)(1).


Oppression

When directors or those in control “have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent[.]” Conn. Gen. Stat. § 33-896(a)(1).

Proving Oppression in Court

Oppression can be proven based on the following criteria:
  1. “[A] lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members, or a visible departure from the standards of fair dealing and a violation of fair play as to which every shareholder who entrusts his money to a company is entitled to rely.”

  2. “[T]he controlling directors’ conduct ‘substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the firm.’”

  3. Devivo v. Devivo, 30 Conn. L. Rprt. 52, 2001 WL 577072 (Conn. Super. May 8, 2001) (internal quotation marks and citations omitted); Booth v. Waltz, Slip Op. No. HHDX04-CV106011749-S, 2012 WL 6846552 (Conn. Super. December 14, 2012).

  4. “[P]etitioning shareholder was denied a voice in the decision-making processes of the corporation and her reasonable expectations to continue to participate in management of the corporation were thwarted.”

  5. Reasonable expectations test: “A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner’s expectations in entering the particular enterprise. Majority conduct should not be deemed oppressive simply because the petitioner’s subjective hopes and desires in joining the venture are not fulfilled. Disappointment alone should not necessarily be equated with oppression. Rather, oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.

  6. Morrow v. Prestonwold, Inc., 31 Conn. L. Rptr. 668, 2002 WL 652369 (Conn. Super. March 22, 2002) (internal quotation marks and citations omitted).



Failure to Elect Directors

“The shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired.” Conn. Gen. Stat. § 33-896(a)(1).


Misappropriation or Waste of Assets

“Note: Even a profitable corporation may be dissolved by the court where for nearly ten years there were no corporate meetings, no input from one of the two 50% shareholders, even though the company was profitable. Martin v. Martin’s News Service, Inc., 9 Conn. App. 304 (1986), cert. denied, 202 Conn. 807 (1987). Consistent lack of profit is insufficient to prove fraud, gross mismanagement, collusion or waste.


Corporate Judicial Dissolution Process

The Corporate Judicial Dissolution Process begins when a shareholder files a petition for the dissolution of a corporation. If the petition is accepted….[ADD INFO FROM FILING OF PETITION FOR DISSOLUTION TO THE COMMENCEMENT OF THE DISSOLUTION CASE]

Shareholders are not necessary parties “unless relief is sought against them individually”, but must be notified within ten days of the commencement of the dissolution case that they “are entitled to avoid the dissolution of the corporation by electing to purchase the petitioner’s shares….” Conn. Gen. Stat. § 33-897(d).

Statutory Buyout Rights


Election to Buy Plaintiff’s Shares

The corporation may elect to buy the plaintiff’s shares; if the corporation does not elect to buy, then one or more shareholders may elect to buy the plaintiff’s shares. The election must be filed within 90 days after the commencement of the dissolution case (the court can extend this period) and must be for “all shares owned by the petitioning shareholder at the fair value of the shares.” Once the election is made it is irrevocable, but can be set aside or modified by the court. If the election is made by one or more shareholders, then all other shareholders besides the plaintiff must be sent notice of their right to participate in the buyout. Shareholders who wish to join in the purchase must file a notice of intention within 30 days of notice to them. Conn. Gen. Stat. § 33-900(b).


After Notice of Election Has Been Filed

The dissolution proceeding may not be discontinued or settled and the plaintiff may not sell or otherwise dispose of his, her or its shares unless the court decides “that it would be equitable to the corporation and the shareholders, other than the petitioner, to permit such discontinuance, settlement, sale or other disposition.”

“All shareholders who have filed an election or notice of their intention to participate in the election to purchase thereby become parties to ownership of shares as of the date the first election was filed, unless they otherwise agree or the court otherwise directs.” Conn. Gen. Stat. § 33-900(b).

Parties have 60 days to agree on price and terms of purchase. If no agreement is reached, then upon any party’s request, court shall stay the case, “and determine the fair value of the petitioner’s shares as of the day before the date on which the petition was filed or as of such other date as the court deems appropriate under the circumstances.” Conn. Gen. Stat. § 33-900(d).

Upon entry of order directing a purchase, plaintiff no longer has “any rights or status as a shareholder.” Conn. Gen. Stat. § 33-900(f). Purchase must be made within ten days of order becoming final, unless before the ten days are up the corporation files its intention to dissolve. The dissolution is treated as voluntary, except the plaintiff may be awarded reasonable fees and expenses if court finds plaintiff had probable grounds for dissolution, and plaintiff “may continue to pursue any claims previously asserted on behalf of the corporation.” Conn. Gen. Stat. § 33-900(g).


Possible Terms and Conditions of Purchase

  1. Installment Payments

  2. Security (collateral) for purchase price, and any costs, fees and expenses the court may award.

  3. Allocation of shares among shareholder-purchasers

  4. Interest, but not when plaintiff refused to accept an offer arbitrarily or not in good faith.

  5. Reasonable attorneys’ fees and expert fees if court finds that plaintiff had “probable grounds” for dissolution.

  6. Conn. Gen. Stat. § 33-900. Booth v. Waltz, Slip Op. No. HHDX04-CV106011749-S, 2012 WL 6846552 (Conn. Super. December 14, 2012).


Appointment of a Receiver /Custodian for a Corporation

If a buyout election has not been made, the court is authorized to appoint a receiver or custodian to wind down and liquidate the company’s assets and to manage the affairs of the corporation.

Grounds for Appointment of a Receiver

The grounds on which a court may appoint a receiver are similar to the grounds for dissolution, including:
  1. Management fraud, waste or oppression. Smith v. Aeolian Co., 53 F. Supp. 636 (D. Conn. 1943).

  2. Corporation is in a state of deadlock.

  3. Shareholder or director meetings have not been taking place or directors have not been elected.

  4. Board has mismanaged or not controlled business.

  5. Reasonable attorneys’ fees and expert fees if court finds that plaintiff had “probable grounds” for dissolution.

  6. Krall v. Krall, 141 Conn. 325 (1954); cited with approval in Martin v. Martin’s News Service, Inc., 9 Conn. App. 304 (1986), cert. denied, 202 Conn. 807 (1987)


Receiver’s/Custodian’s Authority

Upon the appointment of a receiver or custodian, the court also determines the duties and powers of the receiver or custodian.

Possible Powers and Duties of a Receiver/Custodian

A custodian “may exercise all of the powers of the corporation, through or in place of its board of directors or officers, to the extent necessary to manage the affairs of the corporation in the best interests of its shareholders and creditors.”. More specifically, they may be empowered with the following rights and responsibilities:

  1. The ability to sell assets with court approval.

  2. To sue and defend on behalf of the corporation

  3. Conn. Gen. Stat. § 33-898(c)

  4. “The right to the possession of all the corporation’s books, papers and property.”

  5. “The power in their own names, or in the corporation’s name, to commence and prosecute civil actions for and on behalf of the corporation.”

  6. “The right to defend all actions brought against the corporation or them.”

  7. “The right to demand and receive all evidences of debt and property belonging to the corporation, and to do and execute in the corporation’s name, or in their names as receivers, all other acts and things necessary or proper in the execution of their trust”

  8. Conn. Gen. Stat. § 52-507

A well-drawn receivership/custodian order will specify other powers, such as the power to open and close bank accounts, compromise claims, the power, with court approval, to enter into financing transactions and encumber assets, the power, with court approval to enter into leases, and will be tailored to the particular needs of the company.


Day 1 Concerns for Receiver/Custodian

  1. Obtain a bond if bond not waived by court. Conn. Gen. Stat. § 52-506.

  2. Get control of cash and institute proper financial controls.

  3. Obtain sole signature authority on bank accounts and insure that adequate and proper insurance is in place.

  4. Assess whether any wages, employee benefit plan contributions, payroll and withholding taxes and sales taxes are past due, and whether adequate funds will be available to meet those ongoing obligations. Review insider compensation and expense reimbursement.

Post Dissolution

After judicial dissolution, the corporation must be closed and liquidated. Only business with the purpose of winding down and liquidating the company may continue. The corporation must collect assets, dispose of property that will not be distributed in-kind to shareholders, discharge, or make provisions to discharge, liabilities, distribute assets to shareholders, and do whatever else is necessary to wind down and liquidate the corporation.

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