Void corporations: The zone of death loophole to avoid liability?

Paul Rivera & Kalibrr, Inc. v. Angkor Cap. Ltd., 2024 WL 3873050 (Del. Ch. Aug. 20, 2024); 8 Del. C. § 510. A void entity can regain that power by following the revival procedures set forth in DGCL § 312. Once revived, the corporation retroactively regains full corporate capacity. Much to the consternation of shareholder derivative plaintiffs and creditors, bad actors are incentivised not to pay franchise taxes, allowing the company to go void. This, and refusing to revive under § 312, prevents plaintiffs from being able to prosecute claims against the void company and derivatively against the bad actors. This outcome is not unlike a murderer being able to avoid prosecution by simply killing his victim in the Zone of Death.[1] 

Delaware faced such a situation when a plaintiff tried to revive a void company to pursue litigation. In re Hawk Sys., Inc., 2019 WL 4187452 (Del. Ch. Sept. 4, 2019). The plaintiff was unsuccessful because under § 312 only a majority of the company’s board or sole director in office at the time it went void could revive the company. Neither condition was satisfied as no directors were available, and the plaintiff, a minority shareholder at the time the company went void, was unable to accumulate additional shares and update the company’s stock ledger (because of the void status) to elect a new board. Therefore, he could not revive the company under § 312.

If a majority of directors in office at the time the corporation went void refuse to authorise its revival, what options do plaintiffs like the one in Hawk have? Section 226(a)(3) offers a solution. This section permits a stockholder to petition the Court of Chancery to appoint a receiver for any corporation when it has abandoned its business and failed to take steps to dissolve, liquidate, or distribute its assets.

It’s clear that void corporations can’t sue or be sued, and, so, a plaintiff can’t maintain a derivative claim on behalf of a void corporation. But the receiver under §§ 226(a)(3) and 291 can bring those claims directly on behalf of the entity. On the other hand, if a shareholder cannot avail itself of revival under § 312, and a court-appointed receiver decides not to bring claims, despite her authority under § 291, then allowing the corporation to go void remains a loophole, helping bad actors escape liability and forever sealing the company in the Zone of Death. 

[1] https://en.wikipedia.org/wiki/Zone_of_Death_(Yellowstone).

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Neil R. Lapinski is a respected corporate, commercial, and fiduciary litigation attorney representing local, national, and international clients in high value and complex disputes.

Phillip A. Giordano is a corporate and commercial litigator with Gordon, Fournaris, & Mammarella in Wilmington, Delaware who frequently appears in the Delaware Court of Chancery.

Madeline Silverman is a corporate and commercial litigator with Gordon, Fournaris, & Mammarella in Wilmington, DE, who frequently appears in the Delaware Court of Chancery.