Dissolving A Company – A primer on ending it all
So the company didn’t work out. It happens. With recent news of studio closures, I thought I would put together this brief guide to shutting down.
First, some definitions
Before the meat, let’s talk about the bones. These are key terms I’ll be throwing around a lot:
Company – the business. This could be an LLC, corporation, etc. Pretty easy one.
Dissolution – a formal process by which the company ceases to exist.
Liquidation – the process of selling off any assets that can be sold off and using them to pay company debts.
Insolvency – this is a term the meaning of which can vary from place to place. Basically, a company is insolvent when it doesn’t have enough money. What “enough money” is changes depending on what law you look at, though. It can mean that there is not enough liquid money to pay all current debts. It can mean there is not enough liquid money and assets to pay all current debts. It might mean there is not enough money and projected future income to pay all debts as they become due. Lots of variance here.
Bankruptcy – a formal process by which an insolvent company liquidates remaining assets and pays down any debts it can in order to restructure without debt or wind up with less potential liability.
Winding up – the period after dissolution in which the company liquidates all its assets, pays off debts and closes its doors.
Tip 1: Plan early.
This really can’t be overstated. If it looks like there is a chance it is not going to work out, put contingency plans in place. The earlier the company does things like forecast insolvency based on the burn rate assuming no additional incoming cash-flow, the sooner its leadership can make every other decision relevant to the shutdown.
Planning early is the difference between a graceful exit in which employees get some severance and some continued healthcare coverage and a disastrous bankruptcy.
Tip 2: Figure out what kind of exit there is going to be.
The big question here is: is the company insolvent? If it is, then the company may need a qualified bankruptcy attorney. While Odin does not do bankruptcy work, we know some great folks who do and can refer companies to them.
If the company is not insolvent, then the smaller question is “how long can the company continue and how ugly can it get?”
Without naming names, we have seen some studios in the past few months shutter in ways that make everyone cringe. Waiting until the last minute to make the decision, laying off employees without benefits, potentially violating certain legal duties, and so on. It doesn’t have to be that way.
Companies looking at closing should get with their
accountants and run some scenarios. There will almost always be a push for a savior financing opportunity (that one last pitch to that one last publisher results in a windfall, a larger company offers to acquire, who knows…). But, the CPA should help with figuring out realistically, what should be the final date or triggering event that leads to the decision to shut down.
This might be based on pure cash-flow. For example, after X date, the company will have no money.
This might be based on cash-flow and some human factors: How much severance does leadership want to provide to staff (if any)? Which benefits can the company keep active for employees (if any) and for how long? Some employees may be entitled to severance based on a contract or local law.
No matter the factors, having a plan in place before the trigger is pulled will make the whole process less painless for all involved.
Tip 3: There will be blood.
Not literal blood, that’s over-dramatizing. But, there will be layoffs. Depending on how big the company is, different legal standards will apply.
No matter the size of the company, legal risk can be mitigated in the way employees are informed. A few key considerations:
Final paychecks. The delivery of final paychecks needs to be done in accordance with state law. Some states require the final paycheck for an employee to be delivered to the employee on the date of termination. Others, like North Carolina, allow a final paycheck to be paid in accordance with the ordinary payroll process (which could be in arrears). Still, providing a final paycheck on an employee’s last day is probably the better practice.
Vacation pay. If an employee is allowed to accrue vacation time, the company may have an obligation to pay the employee back for the accrued vacation time. This will vary from state to state and based on the company’s policies and past practice.
Severance. Companies will need to decide how much severance they are obligated to pay (if any) and how much they want to pay to employees. Obligations to pay severance might come from individual employee contracts or general past practice (a company that has always paid 2 weeks might be interpreted as having made an implied promise to keep doing so). It can also come from federal or state law (See below). In making decisions around discretionary severance, some typical scenarios for severance are to pay one set amount to everyone (e.g., everyone gets a few weeks severance pay), to pay tiered amounts based on position or to pay severance based on tenure.
Benefits. If the company has health insurance, someone inside the company will need to take a serious look at how to deal with that policy. Under the Consolidated Omnibus Budget Reconciliation Act (which we all refer to as “COBRA”), if the company maintains the health insurance plan after terminating employees, then the terminated employees must be allowed to elect to remain on that plan for a period. Under some applicable laws, the company may also have an obligation to subsidize a portion of those premiums for a period. Likewise, if the company provides any employee 401(k) benefits, the company should expect questions about that plan from terminated employees. Someone should be in place to answer those questions, and information on who that is (it could be a third party vendor) should be accessible to terminated employees.
Equity. If an employee owned stock or options, the company should analyze who will vest as of the dates of their terminations. While it may be that there is little to no money left for the shareholders, if there is, the company will have an obligation to distribute it to the shareholders in accordance with its governing documents (see below) and it will need to know who should get what.
Warn laws. These are laws that require advanced notice to employees. The federal Worker Adjustment and Retraining Notification Act (WARN, not WARNA for some reason) requires companies with more than 100 employees provide 60 days’ notice to employees before a plant closing or mass layoff. Failure to do so can result in claims against the company for payment of wages for employees during the warn period or penalties. A plant closing is a closing of a single employment site with job loss of more than 50 people during a 30-day period. A mass layoff is a reduction in force of more than 500 employees or 50-499 employees if they make up at least one-third of the active work force. There are also state laws equivalent to WARN with different requirements and different thresholds. There are some exceptions to these notice periods as well. Failing to understand these obligations and the exceptions can be costly.
Notice and Waiver requirements. Best practice is to get a waiver of claims from terminated employees. There are a number of legal requirements in order to make that waiver of claims effective, of course, but getting the waivers is key to minimizing liability. Conditioning discretionary severance on the execution of the waiver can help grease the wheels for the employee to sign and agree to the waiver. Some employees, like those 40 and over under the Age Discrimination in Employment Act, need to get additional, more specific notices about their legal rights.
The meeting. At some point, the company has to tell the employees they are being let go. Whether that is 60 days in advance like under WARN, or the day of the terminations as may be the case in smaller studios, it’s going to be uncomfortable. Ordinarily, when doing layoffs, attorneys suggest doing them one at a time so that employees can ask questions and have them answered and each can be made to feel appreciated. In some cases, though, it might not be practicable to do that (for example, if everyone is being laid off, telling one person at 8am and one at 4pm may lead to some news coverage around noon that leads the 4pm employee to panic before his or her meeting). How and when to notify employees will vary by company culture, legal requirements and anticipated reaction. The company should consider who will deliver the message, whether additional security is needed and what materials to provide to employees (information about ongoing COBRA coverage, severance, separation agreements, etc.). Employees should be given time to collect their belongings (or arrange for later time to do so). Access to IT infrastructure should terminate immediately after (or even during) the meeting.
The second meeting. This is the meeting with the core team. Anyone staying on after the layoff needs to be on the same page about expectations and deliverables. There will be a wind down period (see below) and having a couple of people to assist with it can be critical. However, getting people to stay in a company they know to be closing can be a challenge. This meeting, then, could turn into an honest discussion about whether an employee is willing to do that, with a contingency in place to let them go and use contractors or third party vendors to fill their role in their absence.
Tip 4: Take inventory before dissolving.
Before dissolving, the company should do some diligence. It should ensure that it has (or creates) an inventory of all of its assets and liabilities, including obligations to former employees.
The company should notify its insurance carriers of the impending dissolution. They may (or may not) be helpful in transitioning employees, providing risk-mitigation tips or giving advice on how to reduce or eliminate different premiums during the wind up period.
The company should collect all accounts receivable. Any money owed to the company is less likely to be paid once those obligated to make payment know the company is going out of business. If unable to collect, the company should consider selling the AR to a collector or a factoring organization for upfront cash.
It should dig into its contractual obligations. Many key agreements (like publishing agreements and leases) may define dissolution as an event of default. It is important to know what happens under those agreements when the company defaults. Does the balance due accelerate? Does IP revert? Can the license be transferred or sold off? What notice requirements are there?
Having all this information as early as possible will make the winding up process much smoother.
Tip 5: Dissolution isn’t the end.
The actual steps required to dissolve the company are straightforward. A plan of dissolution needs to be drawn up. That plan then requires board and shareholder approval. That approval must be done in accordance with applicable state laws as well as the company’s bylaws and charter. If there are any shareholder agreements or other key agreements, those should also be checked for requirements in dissolution.
Once all required approvals are gathered, a certificate (or articles depending on the jurisdiction) of dissolution will be filed with the appropriate state offices. Certificates of withdrawal should also be filed in any jurisdiction where the company is authorized to do business outside of its principal state.
The company will also need to pay any taxes owed to applicable state taxing authorities prior to or in connection with filing dissolution documents.
That’s basically it.
But the fun doesn’t stop there.
Following dissolution, there is a period called “winding up.” The company continues to exist, but it does so only to take care of all final matters. Ordinarily, one officer is put in charge of this process. Winding up includes concluding any litigation in process, selling off or disposing of all company property, discharging the company’s liabilities and distributing remaining assets to shareholders.
The company’s first obligation in winding up is discharging liabilities. Money in the coffers should be spent first on secured debts (those debts that come with liens on particular assets) then on unsecured debts. Paying off secured debts also allows the company to sell off the secured assets. Some states have a “claims notice” process by which a company can publish a claims notice and wait for debtors of the company to come forward. In some instances, claims not brought under the process are waived. If claims are made, they should be reviewed and paid or disputed.
When the debts are paid and litigation concluded, a final tax return should be prepared and filed.
Then, any money remaining in the company accounts should be paid to the shareholders in accordance with the charter. Some companies will have preferential payouts to certain investors, so it is possible that some shareholders will receive nothing.
Tip 6: It’s all about grace.
Dissolution of the company does not have to mean the end of a career.
Dissolution of the company does not have to mean leaving the industry and pursuing other things.
It can, of course, but if handled properly, dissolution can be just another step in the cycle of business. People are forgiving, and most people love a good redemption story. The phoenix rising from the ashes.
If possible, help employees find new jobs. Send them information on resources like the IGDA Mentor Cafés, which can help game developers impacted by layoffs and studio closures get back on their feet.
What is outlined above is not an exhaustive list of everything company leadership will have to deal with, but I hope it can at least be helpful in building an understanding of the conversations that should happen with the company’s finance, legal, tax and HR professionals.