Brock is a shareholder of Competent Homebuilders Corporation (CHC). For the last few years, business has not been profitable for CHC. The firm has lost money on its operations. There has been some profit through sales of company assets, but the board of directors has refused to declare a dividend. This last year, the firm's accountants failed to file federal income tax returns and the board refused to pay the tax. Brock takes a close look at the firm and protests to the board, in particular over the failure to declare a dividend, but the board ignores the complaint. Which of these events, if any, would form a ground for a court to order the dissolution of CHC, on Brock's petition? If the court denies the petition, could Brock and the other shareholders dissolve CHC?

Question

What will be an ideal response?

Answer 1

A court might order the dissolution of CHC based on its failure to pay federal income tax due. The other circumstances might be unfavorable to shareholders, but would not serve as a legitimate ground for the corporation's dissolution. Shareholders may succeed in a petition of the dissolution of a corporation if there is a deadlock among the directors, if the directors act illegally (failure to pay taxes), fraudulently, or oppressively toward minority shareholders, or if the corporate assets are being misused. Failure to declare a dividend and failure to earn a profit are not grounds for which a court would order a dissolution if the directors are complying with their fiduciary duties.

In some states, shareholders can dissolve their corporation at will. If the board agrees, the dissolution will be voluntary. Procedures for voluntary dissolution vary in different states. Generally, the directors act as trustees of the corporate assets in winding up the firm's affairs for the benefit of the creditors and shareholders. The process will include notifying the state and the firm's creditors, and making distributions. This may be done without court supervision unless the shareholders or creditors can show the court why the board should not act as trustees. The corporation's assets will be liquidated (converted into cash) and distributed among its creditors and shareholders according to the applicable rules of preference. Generally, the creditors are paid before the shareholders. If the board does not agree to the dissolution, it will be considered involuntary. In that situation, a court may appoint a receiver to wind up the corporate affairs.