Also known as: liquidating distributions · liquidation distribution · liquidation distributions · distributions in liquidation · liquidating dividend
Written by attorneys — see sources below.
A distribution of assets by a dissolving corporation or partnership to its owners after the entity has paid or made reasonable provision for its creditors. The distribution occurs only once claims are discharged or secured so that remaining value reaches shareholders or partners according to their interests.
Lakewood Manufacturing sold its factory and paid all secured lenders. Its directors set aside funds for an unresolved supplier invoice and a possible tax audit claim before distributing the remaining cash to Lars Lindstrom as sole shareholder. The payment to Lars qualifies as a liquidating distribution because the board first discharged or reserved for known liabilities under the statutory winding-up rules.
Lunar Dynamics LP completed its final project and paid all outside creditors. The general partner then transferred the remaining cash to limited partner Luna Lang in proportion to her transferable interest. The transfer constitutes a liquidating distribution because it followed full satisfaction of partnership obligations and allocated surplus according to pre-dissolution rights.
In 1986 the business of USA-Cafes, Inc., a Nevada corporation, was reorganized into USACafes, L.P., a Delaware limited partnership, and USACafes General Partner, Inc., a Delaware corporation that serves as the general partner of the Partnership. Sam and Charles Wyly own all of the stock of the General Partner, sit on its board, and personally own 47% of the limited partnership units. Four other individuals also serve as directors of the General Partner. In October 1989 Metsa Acquisition Corp. purchased substantially all of the assets of the Partnership for $72.6 million, or $10.25 per unit. In connection with the sale the Wylys received more than $11 million from Metsa in payments described as consideration for covenants not to compete. The General Partner received a $1.5 million payment right. Defendant Rogers had a $956,169 loan forgiven and received an employment agreement providing for a $1 million payment upon change in control. Defendant Tuley had a $229,701 loan forgiven. The other directors received employment agreements providing for $60,000 payments upon change in control. Plaintiffs, holders of limited partnership units, filed consolidated class actions in the Court of Chancery of Delaware on behalf of all limited partnership unitholders except defendants. They allege that the sale price was low because the directors of the General Partner received side payments totaling between $15 and $17 million that were not offered to the unitholders. The amended complaint also asserts claims based on a December 5, 1986 prospectus issued in connection with the reorganization, which allegedly misrepresented that unitholders would have a right to vote on a liquidation of the Partnership. Metsa is named as a defendant for allegedly participating in the other defendants' conduct by offering and making the personal payments. The Wyly defendants and the other director defendants moved under Rule 12(b)(6) to dismiss the breach of fiduciary duty claims and under Rules 12(b)(2) and (4) to dismiss for lack of personal jurisdiction. The Partnership, General Partner, and individual defendants moved to dismiss the prospectus claims. Metsa moved under Rule 12(b)(6) to dismiss the claim against it.
View caseDirectors must first discharge or make reasonable provision for all claims. Only after satisfying that requirement may the corporation distribute remaining assets to shareholders.
No. The statute permits reasonable provision for contingent claims rather than full payment of every conceivable exposure. Directors may set aside targeted reserves based on known information without immobilizing the entire upper range of an unasserted claim.
A liquidating distribution occurs only during dissolution after creditors are addressed and ends the owner's interest in the entity. A nonliquidating distribution occurs while the business continues and does not terminate ownership.
After creditors are paid, the partnership must first return the value of unreturned capital contributions reflected in transferable interests. Only then may any remaining surplus be allocated according to pre-dissolution distribution rights.