What You Should Know About Voluntary, Administrative, and Judicial Dissolution of a Business Entity
As a business owner, you may find yourself in a situation where you either need to dissolve your company, you are being forced to dissolve your company (either by other owners or by the state), or you simply want to know what your potential exits are. This post will explain dissolution in Washington, and how it can affect your business.
In Washington, closely-held corporations may be dissolved in one of three ways: 1) voluntarily, by vote of the shareholders or directors; 2) by administrative dissolution; or 3) by judicial dissolution.
To voluntarily dissolve a corporation, generally the corporation’s board of directors may propose dissolution for submission to a vote of the shareholders. Two-thirds of the authorized shareholders then must approve the proposed dissolution. The initial directors, incorporators, or board of directors may also dissolve the corporation by majority vote under certain circumstances, like when no shares have been issued. Following the vote to dissolve, the company must file Articles of Dissolution with the Secretary of State to notify the state of its intention to dissolve the company. There’s no filing fee in Washington to file the form unless you want expedited service.
The secretary of state has the power to administratively dissolve corporations for failure to pay license fees, to deliver the initial or annual report to the secretary of state, or to maintain a registered agent. The corporation may apply to the secretary of state for reinstatement within five years of such dissolution. Reinstatement restores certain privileges (e.g., the right to sue) that are suspended so long as the company remains administratively dissolved.
RCW 23B.14.300 governs judicial dissolution. A shareholder may seek a court order dissolving the corporation in the event of certain events, including: 1) deadlock; 2) illegal, oppressive, or fraudulent behavior of those in control of the corporation; 3) misapplication or waste of the corporation’s assets; 4) failure within a reasonable time to wind-up after business activity has ceased.
Deadlock is defined by statute as either 1) director deadlock that cannot be broken by shareholders; or 2) shareholder deadlock, where shareholders have failed to elect successors to directors whose terms have expired for two consecutive annual meetings. And deadlock can also be where there is actual or potential irreparable injury to the corporation, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders.
Oppression as a reason to dissolve a corporation is an important concept for minority shareholders, because it may provide a remedy if the controlling shareholders aren’t playing fair “Oppression” is defined by case law as 1) conduct that frustrates the expectations of a minority shareholder; and 2) “burdensome, harsh and wrongful conduct; 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 on which every shareholder who entrusts his money to a company is entitled to rely.“ This topic deserves a more thorough treatment than this blog post warrants. For now, recognize that actions for the benefit of the controlling shareholder(s) at the expense of minority shareholder may meet the definition of oppression.
Misapplication or Waste
Misapplication or waste of corporate assets is specific to the factual circumstances, but a general definition is: where that misapplication or waste is an exchange “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate [value]” or “where directors irrationally squander or give away corporate assets.”
If you’re interested in help dissolving a business or have general questions about corporate governance, please comment below or contact us today.