Anyone who needs to know the latest iterations of Delaware law regarding the intricacies and nuances of the dissolution of a corporation and the related winding-up process–needs to read the recent Delaware Court of Chancery decision styled: In re Altaba, Inc., C.A. No. 2020-0413-JTL (Del. Ch. Oct. 8, 2021). This scholarly and extensive analysis of statutory dissolution of corporations and the related winding-up process, weighing in at 66 pages, could easily qualify as a law review article.
Selected Background Facts:
The context of this decision involved a company that dissolved in October 2019, and elected to pursue the optional court-approved process to wind-up its affairs. In May 2020, the company filed proceedings to ask the court to determine the appropriate amount and form of security for various claims. The company also requested court approval to make interim distributions.
The company was previously known as Yahoo, Inc., and was purchased in 2016 by Verizon. Shortly after the agreement to sell to Verizon, a major attack by hackers resulted in monumental data breaches. As a result, the company agreed to indemnify Verizon for 50% of the financial responsibility for class actions filed in connection with the data breach. A settlement of the class actions was reached and approved by a federal district court, but that decision is on appeal.
Key Issue Addressed
One of the issues for Chancery to decide was the appropriate amount and form of the security for the dissolved company to maintain in the event that the settlement was reversed or overturned on appeal. The company wanted to only maintain security for the 50% of the settlement that the district court approved, but Verizon wanted a much larger number to cover the risk that the court of appeals would not approve the settlement of the class action, and if then the case went to trial.
• The court engaged in a deep dive into the doctrinal underpinning, public policy and statutory procedures required in the winding-up process for a dissolved corporation. The codification of the “absolute priority rule” to make stockholders wait until creditors are paid also was explored. See Slip op. at 22-27.
• The court explained that a dissolved corporation can pursue one of two paths to wind-up its affairs based on the statutory scheme in Sections 280, 281 and 282 of the Delaware General Corporation Law.
• The Court referred to one as the “default path” in which the board decides the amount of security for any claims by creditors of the dissolved corporation. But this approach leaves open the risk that unhappy creditors will challenge the amount or form of security and pursue claims against board members and possibly stockholders as well.
• The court called the second option under the statutory dissolution scheme the “elective path.” Under this statutory option, the dissolved company can seek court approval for the amount and form of security for claims. This approach gives the board and stockholders the protection of court approval against any claims by creditors that the amount of security was not sufficient. See Slip op. at 27-31.
• The court explained that there are three general categories of claims, and three different corresponding standards that apply to each category of claims. The court discussed at length the applicable standard for each category in order to determine if sufficient provisions are made to cover claims against the dissolved corporation. See Slip op. at 38-39.
• The court applied the applicable standard to determine the appropriate form and amount of security for the claim by Verizon in this matter. Id. at 49-60.
• The court discussed the public policy considerations in connection with allowing claims against a dissolved corporation and the need for dissolved corporations to deal fairly with the creditors who have those claims.
• The statute provides for an initial three-year winding-up period, but the statute allows also for automatic extensions of that initial three-year period. See Slip op. 60-64 and footnote 22.
• In this scholarly and thoughtful analysis of the statutory winding-up process for dissolved corporations, the court explains the reasons for its determination of the amount of security for Verizon, including its perception of the expert testimony presented in this matter. See Slip op. 64-66.