Bloomberg Law Analysis

ANALYSIS: Can Delaware Cancel My Company?

Jan. 17, 2020, 11:46 AM

In a word, yes. In cases of abuse or misuse of its powers or privileges, the Delaware Attorney General may request dissolution of a business entity.

Under amendments to Delaware statutory law that became effective in 2018 and 2019, the state’s Attorney General (AG) has authority to initiate proceedings to cancel or revoke the corporate charter or certificate of formation of Delaware corporations, limited liability companies (LLCs) and limited partnerships. In particular, the statute refers to abuse, misuse or, in the case of a corporation, nonuse of the entity’s powers, privileges or existence/franchises.

Other jurisdictions have similar provisions. The Model Business Corporation Act (2016 Revision), § 14.30(a)(1)) permits the Attorney General to petition a court for dissolution if “the corporation has continued to exceed or abuse the authority conferred upon it by law.” Some state LLC statutes also give similar authority to the Attorney General, such as, for example, Kan. Stat. § 17-76,117; Mo. Rev. Stat. § 347.143; and Or. Rev. Stat. § 63.661.

The revocation power is a new tool in the civil enforcement toolkit of Delaware’s top prosecutor. The apparent breadth of Delaware’s authority—not just to sanction entities that exceed their authority, but also those that abuse or misuse their powers or privileges—means that corporate counsel, tax counsel and compliance professionals may need to take a second look at the potential implications of the statute.

In 2019, the first full year in which the Delaware corporation and LLC provisions were in effect, AG Kathleen Jennings initiated six forfeiture proceedings against a total of 15 Delaware entities.

Most recently, the AG sought to cancel the corporate charters or certificates of formation of Delaware corporations and LLCs owned or used by three former associates of President Donald J. Trump: Michael Cohen, Paul J. Manafort, Jr. and Richard W. Gates III. The AG filed the forfeiture actions on September 19, 2019, but the defendant entities never responded. Consequently, on January 13 and 14, 2020, the AG moved for default judgment and cancellation of the entities’ incorporation or formation documents.

The suit against Cohen-controlled companies Essential Consultants LLC and Resolution Consultants LLC (Jennings v. Essential Consultants LLC, C.A. No. 2019-0755-AGB) was brought under Section 18-112 of the Delaware Limited Liability Company Act (6 Del. C. § 18-112). That section provides that the Court of Chancery, upon motion by the Delaware attorney general, has jurisdiction to cancel the certificate of formation of any Delaware LLC “for abuse or misuse of its limited liability company powers, privileges or existence.”

The AG contends that Cohen, a corporate officer and principal of the LLCs, has confessed to using the LLCs for criminal felony violations, including tax evasion, false statements to a bank and campaign finance law violations, which constitute an abuse or misuse of the LLCs’ powers, privileges and existences. The complaint alleged that the LLCs were shell companies used by Cohen to facilitate payments to purchase the silence of two women who claimed to have engaged in extramarital sexual relations with a U.S. presidential candidate.

The suit based on actions of Manafort or Gates (Jennings v. LOAV LTD., C.A. No. 2019-0752-AGB) requests the Court to cancel the certificates of formation of four Delaware LLCs under Section 18-112 of the Delaware Limited Liability Company Act and revoke or forfeit the charters of two Delaware corporations “for abuse, misuse or nonuse of [the corporations’] corporate powers, privileges or franchises” pursuant to authority set forth in Section 284 of the Delaware General Corporation Law (8 Del. C. § 284).

The Manafort/Gates entities were used to launder funds and conceal taxable income, according to the complaint and underlying criminal indictments. In addition, the complaint alleged that two of the LLCs failed to appoint a registered agent and one of the corporations failed to pay taxes and submit annual reports, deficiencies that potentially constitute independent bases for the AG’s action. In any event, it is clear from these proceedings that the law applies not only to shell entities but to functioning ones as well.

The AG’s office filed similar actions on September 19, 2019 against Delaware entities that had been placed on the U.S. Department of the Treasury Office of Foreign Asset Control (OFAC) Specially Designated Nationals (SDN) List for (a) undermining the democratic processes or institutions of Zimbabwe (Jennings v. Masters International Inc., C.A. No. 2019-0756-AGB) and (b) involvement in laundering money obtained by narcotics trafficking into the United States and violations of the Foreign Narcotics Kingpin Designation Act, 21 U.S.C. §§ 1901 et seq. (Jennings v. Oyster Investments LLC, C.A. No. 2019-0758-AGB; Jennings v. Agusta Grand I LLC, C.A. No. 2019-0759-AGB; and Jennings v. 200G PSA Holdings LLC, C.A. 2019-0760-AGB). Although none of the defendants has filed a response to the complaints, the AG has not yet moved for default judgment in any of the four proceedings.

In one of the earliest actions brought under the new provisions (Jennings v Backpage.com LLC, C.A. 2018-0838-SG, (Del.Ch. Nov. 19, 2018)), the AG successfully petitioned the Court of Chancery to revoke the formation certificates of this website operator and related entities, which nonetheless remain in existence pending completion of various criminal proceedings.

With assistance from Nicholas St. John.

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