Waiver of liquidation distributions: Overview, definition, and example
What is a waiver of liquidation distributions?
A waiver of liquidation distributions is a legal agreement in which a party, often a shareholder or partner, agrees to forgo their right to receive a portion of the proceeds from the liquidation of a company or business. In the event of liquidation, when a company sells off its assets and distributes the remaining funds to its creditors and owners, certain parties may waive their entitlement to these distributions, often for strategic, financial, or legal reasons. This waiver allows the company to focus on paying more pressing debts or satisfying other obligations before distributing any remaining assets.
In simpler terms, a waiver of liquidation distributions is when someone agrees not to take their share of the money or assets if the company is liquidated.
Why is a waiver of liquidation distributions important?
A waiver of liquidation distributions is important because it can help streamline the liquidation process, particularly when the company needs to settle its obligations with creditors first. In some cases, shareholders or partners may waive their rights to distributions in order to ensure that the company’s debts are fully paid, or to allow the company to focus on other priorities. This can be an important tool in business restructuring, mergers, or bankruptcy scenarios.
For SMB owners, understanding the implications of waivers in liquidation can help manage business exits, mergers, or wind-down processes more effectively.
Understanding waiver of liquidation distributions through an example
Imagine your small business is going through a liquidation process because it is closing down. As part of the liquidation, assets are sold, and the proceeds are used to pay off the company's outstanding debts. You, as the owner, have the right to a portion of the remaining funds. However, due to the company’s financial situation, you decide to sign a waiver of liquidation distributions, agreeing not to take any of the remaining money. Instead, the money will be used to settle debts with creditors.
In this case, the waiver allows the company to prioritize paying off creditors rather than distributing funds to shareholders or partners, which can help ensure that the company complies with its obligations during the liquidation.
Example of a waiver of liquidation distributions clause
Here’s an example of what a waiver of liquidation distributions clause might look like in a contract:
“The Shareholder hereby waives any and all rights to receive distributions from the liquidation of the Company. In the event of liquidation, the Shareholder agrees that all remaining proceeds after payment of outstanding debts and obligations will be used solely to satisfy the Company’s creditors, and the Shareholder will not be entitled to any portion of the liquidation proceeds.”
Conclusion
A waiver of liquidation distributions is a key tool in business transactions, particularly during liquidation or restructuring. By waiving the right to distributions, business owners, shareholders, or partners can help ensure that the company meets its obligations to creditors or other stakeholders first. For SMB owners, understanding when and why a waiver of liquidation distributions may be necessary is crucial for managing the end of a business’s life cycle and ensuring that the company’s financial and legal responsibilities are properly addressed.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.