How to mitigate post-closing risks to facilitate asset distribution and entity dissolution
Jason B. Hirsh
by Jason B. Hirsh
After a transaction closes, sellers often wonder – when can all the proceeds be distributed? This question can be complicated, particularly where there are surviving representations, warranties, or indemnity obligations. While the Delaware Limited Liability Company Act (the Act) provides a framework for proper dissolution and distribution, it does not provide a one-size-fits-all answer and the issue requires careful consideration of both existing claims and contingent claims.
The Act provides that a dissolved limited liability company (LLC) must make “provision as will be reasonably likely to be sufficient to provide compensation for claims that have not been made known to the limited liability company or that have not arisen but that, based on facts known to the limited liability company, are likely to arise or to become known to the limited liability company within 10 years after the date of dissolution”.[1] The Act further provides that a dissolved LLC “[s]hall pay or make reasonable provision to pay all claims and obligations, including all contingent, conditional or unmatured contractual claims, known to the limited liability company”.[2]
Addressing this issue, in Capone v. LDH Mgmt. Holdings LLC,[3] the court referred to a leading treatise stating, “a contingent or conditional claim against the limited liability company must be accounted for under Section 18–804( [b] )(1) irrespective of the likelihood that it will actually ‘vest’” (emphasis included). The court added that Section 18-804(b)(1) clearly requires a dissolved LLC to provide for all claims, “including all contingent, conditional or unmatured contractual claims”, that are “known to the limited liability company”.
The Act arms the aggrieved party with additional tools, including the appointment of a receiver to chase assets.[4] If an LLC doesn’t make “reasonable provision”, the defect may be corrected by reviving the company for the purpose of a lawsuit.[5]
That said, sellers must be cognisant of the rules of the road regarding asset distribution and entity dissolution. Having a receiver chasing after distributed assets will not be welcome news to investors. To mitigate the risks, it is important to, among other things, actively negotiate limited survival periods and limited periods of indemnification. To the extent that negotiations can circumscribe “contingent” claims, a selling entity will significantly mitigate its risks of post-closing litigation under the Act. And, ultimately, it is mission critical to make “reasonable provision” in compliance with the Act to avoid disputes down the road.
[1] Del. Code Ann. tit., §618-804(b)(3).
[2] Del. Code Ann. tit. 6, §18-804 “[emphasis added]”.
[3] Capone v. LDH Mgmt. Holdings LLC, No. CV 11687-VCG, 2018 WL 1956282, at *7 (Del. Ch. Apr. 25, 2018), judgment entered, (Del. Ch. 2018).
[4] Del. Code Ann. tit., §618-805. [5] Id.
Jason Hirsh is a partner and leader of Levenfeld Pearlstein's Litigation Group where he focuses on protecting the rights and assets of our clients. Jason’s practice is dedicated to business litigation, representing clients in real estate, corporate, financial services, and other business-related matters often involving fraud, breach of contract, shareholder/member disputes, restrictive covenant disputes, and trade secrets disputes. Contact Jason.
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