The squad does not have to be disbanded in order to reform under a new CO. A squad in Aces High II is built around the CO. The name of the squad is arbitrary. In otherwords, the same name can be used under a different CO.
To form under a new CO, all the existing members would simply have to leave the current squad, and the new CO has to invite the members back into the new squad.
All stats for that squad will be lost, as the squad is based on the CO.