We want to distribute our transaction proceeds to our shareholders immediately at close, but the buyer's three-year survival period for general representations is blocking us. How do we use a liquidation trust to wind down the business while protecting our shareholders?

Question

Tyler Smith · Accepted Answer

When you sell the assets of a corporation, the entity must remain alive to satisfy any potential indemnification claims during the survival period, which typically ranges from twelve to thirty-six months. If you distribute all the cash immediately, your directors could face personal liability for leaving the corporation undercapitalized to meet its potential contractual obligations to the buyer.

To solve this and achieve a clean break, you can establish a liquidating trust under state law. At closing, the selling corporation transfers all its remaining assets, including the right to receive any escrow releases or earnout payments, to the trust. The trust then assumes the responsibility for defending any post-close indemnification claims.

The trust holds a designated reserve of cash to cover potential liabilities, while the vast majority of the sale proceeds are immediately distributed to the shareholders. This reserve is calculated based on a realistic risk assessment of your representations and warranties, not the maximum cap demanded by the buyer.

To make this trust highly defensible, use your EOS® core process documentation to prove that your operational risks are low. Showing a history of clean compliance, documented safety procedures, and verified financial audits will justify a smaller reserve. Once the survival period expires, any remaining cash in the liquidating trust is distributed to the shareholders. This structure allows your leadership team to move on to their next ventures without leaving millions of dollars trapped in a dead entity.