THE INTEGRITY OF DELAWARES CORPORATE DISSOLUTION STATUTE AFTER TERRITORY OF THE UNITED STATES.docx

THE INTEGRITY OF DELAWARES CORPORATE DISSOLUTION STATUTE AFTER TERRITORY OF THE UNITED STATES.docx

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THEINTEGRITYOFDELAWARESCORPORATEDISSOLUTIONSTATUTEAFTERTERRITORYOFTHEUNITEDSTATES

55STLULJ1173

Page_

55St.LouisU.L.J.1173

©2012ThomsonReuters.NoClaimtoOrig.USGov.Works.

55STLULJ1173

Page_

55St.LouisU.L.J.1173

©2012ThomsonReuters.NoClaimtoOrig.USGov.Works.

SaintLouisUniversityLawJournal

Spring2011

Comment

*1173THEINTEGRITYOFDELAWARE'SCORPORATEDISSOLUTIONSTATUTEAFTERTERRITORYOFTHEUNITEDSTATESVIRGINISLANDSV.GOLDMAN,SACHS&CO.:

ISEXTENDEDPOST-DISSOLUTIONSHAREHOLDERLIABILITYANECESSARYCOMPONENTOFDELAWARE'SCORPORATEDISSOLUTIONSCHEME?

EdwardT.Pivin[FNa1]

Copyright（c）2011SaintLouisUniversitySchoolofLaw;EdwardT.Pivin

Introduction

      Thepossibilityofcorporatedissolutioncreatesbothanincentiveforopportunisticcorporationstoavoidfutureliabilityandacorrespondingriskofnon-compensableharmforconsumersandthegeneralpublic.[FN1]Thisisespeciallytrueintheareaofproductsliabilityandenvironmentalcontamination,whereacompany'sproductsormanufacturingactivitiesmayinflictharmmanyyearsaftertheentityhasdissolvedanddistributeditsassets.[FN2]*1174Toeliminatethis“dissolutionincentive,”[FN3]moststateshaveenactedstatutoryschemesthatregulatecorporatedissolutionandimposevaryingdegreesofliabilityuponbothdirectorsandshareholders.[FN4]

      Inthelate1980s,theStateofDelawaredevelopedastatutoryscheme,thenrevolutionary,thatsoughttobalancethecompetingpolicyconcernsofcorporateandtortlaw.[FN5]Whilerevisedsinceitsinception,Delaware'sdissolutionschemeisstillpredicatedupontwocompeting,butnotirreconcilable,policyconcerns:

1）theexpeditiousdistributionofcorporateassetsinamannerthatfacilitatestheirsubsequentbeneficialutilization;and2）theprotectionofcorporatecreditorsandclaimants.[FN6]Basedonthesepolicyconcerns,Delaware'sstatutoryschemeprovidescorporatedirectorswithachoicebetweeneitherformal,judiciallysupervisedwind-upproceduresorinformal,extrajudicialwind-upprocedures.[FN7]Generally,judiciallysupervisedwind-upprovidesbothdirectorsandshareholdersgreaterinsulationfromliabilityandaffordsshareholdersgreatersecurityforliquidationdistributions.[FN8]Inaddition,judiciallysuperviseddissolutionprovidescorporatecreditorsandclaimants--known,contingent,andunknownbutforeseeable--withagreaterdegreeofprotectionthanextrajudicialdissolution.[FN9]Thus,judiciallysuperviseddissolution,whilecostly,efficientlysatisfiesthecompetingpolicyconcernsunderlyingDelaware'sstatutoryscheme.[FN10]Extrajudicialcorporatedissolution,*1175ontheotherhand,failstoadequatelysatisfypolicyconcerns--i.e.,protectionofcorporatecreditorsorfacilitationofcorporateassetdistribution--insituationswherecorporationshavepotentialfutureliability.[FN11]

      Electivecorporatedissolutionunderjudicialscrutinyis,giventhepossibilityoffutureliability,theoptimummethodofcorporatedissolution.However,inTerritoryoftheUnitedStatesVirginIslandsv.Goldman,Sachs&Co.,theDelawareCourtofChanceryinterpretedDelaware'sdissolutionstatuteasprovidingshareholdersthesamedegreeofprotectionfromfutureliabilityregardlessofwhetherthecorporationwindsupitsaffairsextrajudiciallyorunderjudicialscrutiny.[FN12]Thisraisesthequestionofwhethertemporallyextendedshareholderliabilityforpost-dissolutioncorporatedistributionsisanecessaryelementofDelaware'sstatutoryscheme.Morebroadly,GoldmanSachsquestionstheutilityofpost-dissolutionshareholderliabilityasanelementofastate'scorporatedissolutionschemeingeneral.GivenDelaware'spreeminentstatusasastateofincorporation,[FN13]thebroadreachandinfluenceofitsCourtofChancery,[FN14]andthecomparativelyuniquenatureofits*1176statutorydissolutionscheme,[FN15]thisCommentwillprimarilyfocusonDelawarelaw.Specifically,thisCommentwilldiscusstheviabilityofexposingshareholderstoextendedpost-dissolutionliabilityasameansofdeterringcorporateliability-avoidancebydissolution.

      UnderthecurrentlawafterGoldmanSachs,shareholderslackanincentivetoinitiateorapproveofformaldissolution--theyareequallyprotectedfrompost-dissolutionliabilityregardlessofthemethodofwind-upthecorporationemploys.[FN16]Moreover,giventheincreasedcostofformaldissolutionanditspotentialtodiminishshareholderliquidationdistributions,shareholdersmayactuallyhaveanincentivetoinitiateorapproveextrajudicialdissolutionasameansofavoidingfutureliabilities.Tofurthercomplicatematters,GoldmanSachsarticulatesastrongpolicypreferenceamongtheDelawareCourtofChanceryfortemporallylimitedpost-dissolutionshareholderliability.[FN17]Thechancerycourt'sdecisioninGoldmanSachsthusthreatenstounderminethebalanceofcompetingpolicyconcernsunderlyingDelaware'sstatutorydissolutionscheme.Inordertopreservetheflexibilityandsecurityofferedtodirectorsandshareholderswhilesimultaneouslyprotectingtheinterestsofcorporateclaimantsatdissolution,Delawarecourtsmusttakeseveralstepstomodifythelawgoverningcorporatedissolution.ToreestablishthebalancebetweencorporateandtortlawpolicyconcernsregardingcorporatedissolutionafterGoldmanSachs,theDelawareCourtofChanceryshouldemploythreemeasures:

1）limitthepowertochoosethemethodofcorporatedissolutionsolelytodirectors;2）imposeanimpliedstatutorydutyuponsuchdirectorstomakereasonableprovisionsforfutureclaimsiftheyelectextrajudicialwind-up;and3）utilizethedoctrineofsuccessorliability[FN18]whennecessarytoavoidpre-dissolutionassetliquidation.Byemployingthesemeasures,theDelawareCourtofChancerycanprotectcorporateshareholdersfromtemporally-indeterminatepost-dissolutionliabilitywhilesimultaneouslyprotectingtheinterestsofpresentandfuturetortclaimants.ThesemeasureswouldalsoallowtheCourtofChancerytoensurethatcorporationswiththepotentialforfutureliabilitywillutilizetheformalwind-upprocedures.This,inturn,willprovide*1177greaterprotectionforcorporateclaimantsinsofarastheformalwind-upproceduresprovideforjudicialsupervisionofcorporatedissolutionandtheappointmentofaguardianadlitemtorepresenttheinterestsoffuturecorporateclaimants.[FN19]Employingthesemeasureswillrestorethedelicatebalancebetweencorporateandtortlawpolicyconcernsregardingcorporatedissolution.

      ThisCommentwillfirsttrackthehistoricaldevelopmentofthelawgoverningcorporatedissolution.Abrief,historicalanalysisofcorporatedissolutionunderthecommonlawwillprovideapropercontextwithinwhichDelaware'smodernstatutorydissolutionschememaybeassessed.Next,thisCommentwillsummarizetheoperationofDelaware'sstatutorydissolutionschemeandthemannerinwhichitbalancescorporateandtortlawpolicyconcerns.Then,theCommentwilldiscusstheGoldmanSachsdecisionanditsimplicationsfortheintegrityofDelaware'sstatutorydissolutionscheme.Finally,thisCommentwillconcludewithseveralrecommendationsforachangeinthelawthatwillenableDelawaretopreservetheintegrityofitsdissolutionschemewhilesimultaneouslyprotectingshareholdersfromtemporallyindeterminatepost-dissolutionliability.

I.HistoricalDevelopmentoftheLawGoverningCorporateDissolution

A.CommonLawCorporateDissolution

      Earlycommonlawviewedthecorporationasadistinctlegalentity,roughlyanalogoustoanindividualhumanbeing.UnderearlyEnglishcommonlaw,thecorporation,orcorporacorporata,wasconsideredan“artificialperson”composedof,yetdistinctfrom,itsconstituentmembers.[FN20]Whenindividualsunitedintoacorporateentitytoachievevariousends--whetherreligious,educational,orcommercial--suchpersonsandtheirsuccessorswereconsidered“onepersoninlaw.”[FN21]

      EarlyAmericancommonlawalsoreifiedthecorporation.InTrusteesofDartmouthCollegev.Woodward,[FN22]ChiefJusticeMarshalldescribedthecorporationasadistinctentitypossessingindividualcharacteristics:

      Acorporationisanartificialbeing,invisible,intangible,andexistingonlyincontemplationoflaw.Beingthemerecreatureoflaw,itpossessesonlythosepropertieswhichthecharterofitscreationconfersuponit....Amongthemostimportantareimmortality,and,iftheexpressionmaybeallowed,*1178individuality;properties,bywhichaperpetualsuccessionofmanypersonsareconsideredasthesame,andmayactasasingleindividual.[FN23]

      Thus,atcommonlaw,thecorporationwasadiscrete,legally-cognizableentityofpotentiallyeternalexistence.Assuch,itwaslegallydistinguishablefromitsconstituentmembersandcapableofactinginitsowncapacity.Thisconceptionofthecorporationhadimportantimplicationsforthelawregardingcorporatedissolution.

      Whilerecognizingtheabilityofacorporationtoexistperpetually,bothBlackstoneandAmericancommonlawalsoacknowledgedtherealityofcorporatedissolution.Perhapsfollowinghisinitialanalogytoitslogicalconclusion,Blackstonedescribedthedissolutionofacorporationasits“civildeath.”[FN24]InOklahomaNaturalGasCo.v.Oklahoma,ChiefJusticeTaftrenderedthisanalogymoreexplicit:

“Itiswellsettledthatatcommonlaw...acorporationwhichhasbeendissolvedisasifitdidnotexist,andtheresultofthedissolutioncannotbedistinguishedfromthedeathofanaturalpersoninitseffect.”[FN25]Inaccordancewiththisanalogy,dissolutionof