When a corporation voluntarily decides to terminate its operations, it must cease its existence as a business entity that is formally registered with the state. The process of ending its corporate identity is referred to as dissolution by the corporate shareholders. California’s General Corporation Law mandates that voluntary dissolution can occur if shareholders with 50 percent of the voting power choose dissolution. Below is a discussion of the dissolution process once the majority of shares have approved the corporate action.
Board action. In California, the Board of Directors (Board) is not required to take any action prior to shareholder approval. In other states, this is typically a requirement. Nevertheless, it is customary for the Board to submit a proposal for dissolution and announce a meeting for shareholders to vote on the dissolution. The corporate documents, including articles of incorporation and bylaws, should provide guidance as to the proper procedures for dissolution.
Written consent. A formal meeting is not mandated if shareholders with at least 50 percent of shares provide written consent for dissolution. In this case, shareholders simply sign a form that provides that the corporation is dissolved, which is then entered into the corporate records. Notice of this action is not required to be given to those shareholders who do not consent to the dissolution or those who are not eligible to vote. Dissolving the corporation through written consent may be preferable for smaller businesses where a majority of the voting shareholders are also directors.
Certificate of election. When the decision to dissolve the corporation is not unanimously approved, the shareholders are required to file a Certificate of Election to Wind Up and Dissolve with the Office of the Secretary of State. The certificate provides certain information including: a declaration that the corporation has elected to dissolve, that the decision was voted upon by shareholders with at least 50 percent of the shares, and a statement authorizing the shareholders to sign the certificate.
Winding up. Once the formal process of dissolution has been completed, the corporation must engage in “winding up” it affairs. This includes paying all debts and liabilities to known creditors and subsequently distributing any remaining corporate assets.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.