Chancery Upholds Waiver of Dissolution Rights in LLC

Huatuco v. Satellite Healthcare,et al., C.A. No. 8465-VCG (Del. Ch. Dec. 9, 2013).

Issue Addressed:  Whether the provisions of the LLC agreement waived the statutory right to dissolution that a member of an LLC would otherwise have, pursuant to Section 18-802 of the Delaware LLC Act. Short Answer:  Yes.

Brief Overview:

This pithy and useful opinion analyzes the terms of an LLC agreement in light of the well-settled principle that Delaware LLC law is based on a contractarian view that the parties can agree to almost anything in an LLC agreement, and can waive rights to almost anything, with limited exceptions such as the inability to waive the covenant of good faith and fair dealing.  See 6 Del. C. Section 18-1101(c).

The parties rejected all of the default provisions that would otherwise apply under the Delaware LLC Act, and expressly limited the rights of the LLC members to those expressly provided for in the LLC agreement.  The right of a member to seek judicial dissolution under Section 18-802 in the context of a member deadlock where it is not “reasonably practicable” to carry on the business of the LLC, was waived.  The Court distinguished the cases highlighted on these pages involving similar issues, such as R&R Capital, LLC v. Buck & Doe Run Valley Farms LLC and Lola Cars Int., Ltd. v. Krohn Racing, LLC.

In closing, an educational footnote in the opinion is especially blogworthy.  Footnote 2 notes that the Court does not address the issue of whether parties to an LLC agreement may divest the Court of its authority as a matter of equity to order a dissolution in all circumstances, even where it appears manifest that equity so requires:  “leaving, for instance, irreconcilable members locked away together forever like some alternative-entity version of Sartre’s Huis Clos .”  The Court found that no such equitable considerations were present in this case.

The preceding quote is destined to be cited often in submissions to the court seeking dissolution in future deadlock cases. The reference is to a play by Sartre that is often translated with the title of “No Exit“. The play is a depiction of the afterlife in which three deceased characters are punished by being locked into a room together for eternity.