Business Associations

Fact pattern

Company X is a private corporation that manufactures nutritional supplements. It is incorporated in a state that has adopted the Model Business Corporation Act (MBCA). Unfortunately, Company X’s flagship nutritional supplement has caused a significant number of customers (Primary Claimants) to develop acute, or highly sensitive, hearing. 

Company X believes that one could see the onset of acute hearing as a positive thing. However, the Primary Claimants disagree, partly because now, even everyday noises often cause them excruciating pain. Further, the acute hearing takes time to manifest. While the incubation period varies by person, some customers do not develop acute hearing for over a year after first consuming the supplement. 

The Primary Claimants have filed suit, and the damage claim is substantial. Consequently, one of Company X’s directors proposes dissolving the company. As the board of directors discusses the matter, it becomes clear that a majority of directors support dissolution. But a few directors are against dissolution, because the company has a potentially lucrative patent-infringement claim pending against a large European conglomerate. 

The directors who favor dissolution face another problem: they are completely unfamiliar with the dissolution process. They understand that they have a duty under the MBCA to set aside funds to address future claims that could be brought against the company. However, they do not believe that they have enough data to estimate the company’s future liabilities. Further, there is concern that, having voted to dissolve the corporation, the directors might subsequently change their minds. 

At the board meeting to resolve this matter, one of the directors says, “I think the first thing we need to do is to put creditor claims into one of two groups. The first group is the claims we know about. I call them the Known Creditors. For example, we know that we owe Oregon Bottling $10,000 for last month’s services. The second group is for the claims we know will someday materialize, but are uncertain at present. I call them the Unknown Creditors. For example, we know that more customers will claim acute hearing damages, but we don’t know specifically who they are, because the symptoms take time to develop.”  All the directors agree with this course, but no one knows what to do once the directors divide the claims into the two groups.

Questions

1. Assume the directors wish to limit shareholder liability upon dissolution as much as possible. To that end, what type of notice should Company X provide to the group of Known Creditors? What type of notice should Company X provide to the group of Unknown Creditors? Explain.
2. The MBCA obligates the directors to set aside sufficient funds to address future claims. But the directors are unable to estimate this amount. Considering this, what course of action would you recommend for them? Explain, keeping in mind that the directors can be subject to personal liability if they fail to set aside sufficient funds.
3. If Company X were to dissolve, would it be able to pursue its lucrative patent-infringement claim? Explain.
4. If Company X dissolved, but nine months later, the directors changed their minds and wished to revoke the dissolution, could they do so? Explain.