In Re Seneca Investments LLC, 2008 WL 4329230 (Del. Ch., Sept. 23, 2008), read opinion here. The Chancery Court in this opinion, on a motion for judgment on the pleadings under Rule 12(c), "puts meat on the bones" of Section 18-802 of the Delaware LLC Act, which is the provision that allows a member of an LLC to petition for dissolution when it "is not reasonably practicable [as compared to practical ] to carry on the business in conformity with the Operating Agreement".

There are precious few Delaware decisions interpreting this statute, so court decisions such as this "can be manna from heaven" for those of us who toil in the fields with these statutes as our tools. I say that they merely can be such, because depending on what argument one needs to make, one is "stuck" with the relatively few opinions to pick from, relative to the copious opinions available on interpretations of the DGCL. Enough pontificating.  Here are some highlights of the court’s opinion:

  • The non-moving party in a motion for judgment on the pleadings pursuant to Rule 12(c) is entitled to the same benefits as the non-moving party in a motion under Rule 12(b)(6).
  • Cases interpreting an analogous and almost identical provision in the L.P. statute were relied on by the court to interpret Section 18-802 of the Delaware LLC Act as allowing dissolution in the following two circumstances:
    • when there is a deadlock that prevents the entity from operating; or

    • "where the defined purpose of the entity was fulfilled or impossible to carry out" (citations omitted).

  • There was no allegation here of deadlock, so in order to determine whether it "was reasonably practicable to carry out the business purpose of the entity", the court looked to the purpose clause of the governing instruments.

  • As is often the case, the purpose clause here allowed the entity to be operated for any "proper purpose", making it very difficult to satisfy the "second option" above.

  • The court cited to other opinions to support its finding that even if an entity serves no other purpose than that of a passive instrumentality to hold investments, such a purpose is both permissible and commonly utilized.

Curiously,  the LLC involved here chose to have its operations governed by the DGCL as opposed to the Delaware LLC Act, which the court found to be quite allowable. Thus, DGCL Section 226(a)(3) was also analyzed.

DGCL Section 226(a)(3) allows the court to appoint a receiver or a custodian for a corporation when: "the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets".

Importantly, however, the court reasoned that the threshold under that section was not triggered under the facts of this case because Delaware law does not require an entity to do any of the following:

  1. have a business plan;
  2. hire employees;
  3. make investments; or
  4. seek to find a buyer

Rather, the court held that as a passive investment company, it was enough that the entity was pursuing counterclaims in this dissolution action, which the court held to be an "acceptable and legitimate business activity." ( I can’t help but make the obvious observation that validating such a business purpose is good for such an entity’s lawyers. Of course, that’s not a bad thing ,as it is one of the things that helps me to put food on my family’s table.)