A recent decision of the Delaware Court of Chancery is noteworthy for clarifying the less-than-clear case law regarding what specific factual allegations in support of a petition for judicial dissolution of an LLC would survive a motion to dismiss. In the case styled: In re: Dissolution of T&S Hardwoods KD, LLC, C.A. No. 2023-0782-MTZ (Del. Ch. Jan. 20, 2023), the court denied a motion to dismiss a summary proceeding for judicial dissolution under Section 18-802 of the Delaware LLC Act.[1]  In denying the motion to dismiss in this matter, the court provided refreshing clarification of the types of allegations that will survive a motion to dismiss in connection with seeking judicial dissolution of an LLC.[2]

Important Issues Addressed by the Court

         The court concluded that the petition for judicial dissolution survived a motion to dismiss based on allegations of:  (i) deadlock among the members; (ii) inability to function; and (iii) lack of any equitable exit mechanism.  Id. at 1. 

Brief Background Facts

         The basic facts underlying the petition for judicial dissolution in this matter involved a 50/50 joint venture between a lumber supplier and a lumber wholesale distributor.  As the court described it, the venture was initially profitable, but the relationship between the two members eventually splintered and collapsed.

         This short synopsis assumes the reader is familiar with the basic principles involved in a petition for judicial dissolution.  The thorough factual summary in the court’s opinion will be abbreviated.  The parties formed their joint venture with the expectation that T&S Hardwoods, Inc. (“T&S”) would provide a steady lumber supply for Robinson Lumber Company, Inc. (“RLC”) to resell.  The joint venture, owned 50/50 by T&S and RLC, would provide T&S with financing between the period when it cut the lumber and when the end customers paid their invoices.

         The parties memorialized their understanding with both an LLC agreement and a contemporaneous joint venture agreement.  The majority stockholder of T&S, Thompson, as well as the owner and president of RLC, Robinson, were the only two managers of the manager-managed LLC.  

         The joint venture was called T&S Hardwoods KD LLC (the “Company”).  The LLC agreement requires that “for most decisions” the managers must reach an unanimous agreement.[3]  The two managers had different responsibilities. Eventually the relationship of the two managers deteriorated.  T&S claimed that the Company owes it for over $9 million in lumber even though the Company has over $5.2 million in cash and over $700,000 in receivables.

         One of the managers unilaterally terminated the viewing access of the other member to the Company’s bank and loan accounts.  In addition to the pending judicial dissolution proceedings, there are two separate lawsuits that each of the members and each of the managers filed against each other.

         RLC filed a derivative action against the other manager and the other member before the dissolution petition was filed. The other member also filed a lawsuit, in Georgia, against the remaining manager and the remaining member.  In an effort to resolve the disputes, T&S sent RLC an offer to trigger a buy/sell purchase option under the LLC agreement–but that was not accepted and did not result in either a purchase or a sale of either member’s interest.

Allegations in Petition

         The petition for dissolution includes allegations that: (i) the other manager is causing the Company not to pay for lumber sold by the remaining member; (ii) the managers are not able to agree on certain aspects of running a business; (iii) the respondent manager is using assets of the Company to facilitate loans to his own company; (iv) the remaining member is using its control over company finances to freeze out the petitioning member; and (v) there is an absence of trust between the parties.

         Based on the foregoing, the petition claims that the statutory standard is satisfied to the extent that:  “it is no longer reasonably practicable to carry on the business of the Company . . . in conformity with the parties’ agreements.”

Court’s Analysis

         The court recited the familiar and plaintiff-friendly standard for a motion to dismiss under Rule 12(b)(6).  For example, the court observed the aspect of the well-settled standard that includes the following nuance:  “Indeed, it may, as a factual matter, ultimately prove impossible for the plaintiff to prove his claims at a later stage of the proceeding, but that is not the test to survive a motion to dismiss.”  See footnote 22 and accompanying text.

Sufficiency of Petition Seeking Judicial Dissolution at Motion to Dismiss Stage

         The court provided a helpful overview of the prerequisites for seeking judicial dissolution under Section 18-802 of the Delaware LLC Act which allows the court to decree dissolution:  “on application by or for a member or manager . . . of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.”  Slip op. at 11. 

         The court added that dissolution has been found to be appropriate in the following circumstances:

  • The LLC’s management has become so dysfunctional . . . that it is no longer practicable to operate the business, such as in the case of deadlock.  Id.[4]
  • Existence of a Deadlock.  The court described deadlock in the context of judicial dissolution as referring to:  “The inability to make decisions and take action.”  Slip op. at 12.[5] 

Court’s Analysis of Adequately Pled Deadlock

         The court described the starting point of an analysis involving LLCs as the agreement between the parties, based on the objective theory of contracts.

         The petition in this matter alleged that the only two managers of the Company are:  “no longer able to work together or make decisions for the Company, which . . . requires unanimity for most decisions.”  Slip op. at 14.  The court cites at footnote 39 several decisions to support its position that deadlock was sufficiently pled. 

         Although this case involved a 50/50 ownership structure, in this writer’s view, the fact that unanimity was required should not distinguish it from an LLC with more-than two members that also requires unanimity for important decisions.[6]

         In the joint venture in this case, T&S Hardwoods KD, LLC, one of the members caused the Company to refuse to pay the other member, and once the Company sold its current inventory unless the managers unanimously decided to source it from someone else, the current inventory would be depleted.

         The court described the many other disputes between the parties that supported deadlock: 

         (1)     Each member accused the other of improper actions in connection with operating the business, including financial wrongdoing and secrecy;

         (2)     One member tried to trigger a buyout under the LLC Agreement, “but the parties could not bring that to fruition.”  Slip op. at 15.

         (3)     Instead of working through their issues as managers of the Company, the two managers have filed separate lawsuits against each other.

         (4)     The respondent in this petition admitted that there was “no longer any trust among the managers.”  Slip op. at 15.

In sum:  The court also reasoned that the allegations were sufficient to survive a motion to dismiss the dissolution petition because taken together, the allegations: 

“support the reasonable inference that the Company’s managers and owners cannot resolve their disputes and cannot work together.” 

Slip op. at 15.[7]   

         The allegations and inferences supporting the dissolution in the Petition led to the court’s observation that: 

“The LLC cannot take any meaningful action without the two sides reaching unanimous decisions and . . . [unless] the managers work together . . ..” 

Slip op. at 15-16.

         The court further reasoned that dissolution was appropriate in situations like the instant one where:  “The two members . . . have stopped interacting and are instead engaged in litigation to resolve the disputes, further demonstrating the need for judicial dissolution.”  Slip op. at 16 (citing Haley, 864 A.2d at 96).[8]

         The court referred to the two pending lawsuits that each of the members filed against each other, in addition to the dissolution proceeding and explained that: “the existence of some ongoing business does not preclude a finding of deadlock.”  Slip op. at 16 (citing Fisk Ventures, 2009 WL 73957, at *4) (emphasis added).

         The informational asymmetry with one member accusing the other of ceasing to provide information about the finances of the Company and denying access to the bank and loan accounts of the Company, was additional factual support for the court’s conclusion.

Allegations in Petition Sufficient

         The court emphasized that: “These allegations reflect a continuing breakdown in the members’ and managers’ relationships,” concluding that:  “The Petition adequately alleges the managers are deadlocked.”  Slip op. at 17.

Petition Adequately Pleads Statutory Test: that “It is not Reasonably Practicable to Carry On the Business in Conformity with the Parties, Agreements”

         The court rejected the arguments in the motion to dismiss that relied on the common language in the LLC agreement that the purpose of the Company was to “engage in any lawful activities . . ..” This reliance failed in the face of the contemporaneous agreement among the parties that expressed a more specific purpose for a very specific type of business to be operated.

         The court explained that judicial dissolution is appropriate where the purpose of the entity was either not fulfilled or impossible to carry out, but when analyzing the purpose the court can look to not only the purpose clause in an organizational document, but also other evidence that may be used to inform the analysis.  Slip op. at 18. (citing Meyer Nat. Foods, 2015 WL 3746283, at *3) (explaining that in addition to the purpose clause other evidence of purpose may be helpful as long as the court is not asked to engage in speculation).[9]

Whether the LLC Agreement Offers an Exit Mechanism that Precludes Dissolution

         The court explained why the buy-sell option in the LLC agreement did not serve as a sufficient method for a party to exit the LLC equitably. 

         In deciding whether a viable exit mechanism in the LLC agreement existed as a basis for denying a dissolution claim, the court emphasized that such an exit mechanism must be “equitable in its operation.”  Slip op. at 21.[10]

         Notably, the court distinguished a recent decision that granted a motion to dismiss prior to trial in a summary dissolution proceeding in the matter styled: In re Doehler Dry Ingredient Solutions, LLC, which is currently on appeal before the Delaware Supreme Court.  The T&S Hardwoods court distinguished the exit mechanism in the Doehler case, finding that the buy-sell provision in Doehler was different.[11]

         In this particular case, the buy-sell provision was optional, and did not force a buyout of any member.  The court supported its reasoning with reference to Fisk Ventures, LLC v. Segal, 2009 WL 73957, at *5, which reasoned that:  “It would be inequitable for this court to force a party to exercise its option when the party deems it in its best interest not to do so.”  Slip op. at 22-23. 

         The buy-sell option in the instant case did not provide an exit mechanism that would resolve a deadlock because it would “not allow Thompson [the member seeking dissolution] to separate himself from the Company.”  Slip op. at 23.

         As applied to the instant matter, the court reasoned that the buy-sell provision would not “equitably effect the separation of the parties” as it would leave the departing member:  “with no upside potential, and no protection over the considerable downside risk” of having to cure any default by the Company.  Slip op. at 23-24. [12]

         The court also noted with emphasis that because there is no mechanism in the LLC agreement to resolve the deadlock, that fact also provides another reason the parties “cannot operate the Company in conformity with the LLC agreement.”  See footnote 24 (citing Vila, 2010 WL 3866098, at *7) (when an LLC agreement requires that there be agreement between two managers for business decisions to be made, those two managers are deadlocked over serious issues, and the LLC agreement provides no alternative basis for resolving the deadlock, it is not “reasonably practicable” to continue to carry on the LLC business “in conformity with its limited liability company agreement.”) (citations omitted).

         In sum:  The court concluded that dissolution is not foreclosed by the buy-sell provision because it would be inequitable to force the parties to engage in that buy-sell procedure.

         Takeaway:  Petitions for judicial dissolution of an LLC are often factually determinative. It remains challenging to address the factual nuances at the motion to dismiss stage in a summary proceeding, but this decision provides helpful instruction on what allegations suffice to allow a claim to proceed to trial.


[1] Notably, motions to dismiss in summary proceedings, when the case involves material, nuanced factual issues are disfavored–but are nonetheless often permitted.

[2] In the interest of full disclosure, the author of this synopsis was counsel for the petitioner.

[3] Note that LLC Agreements for closely-held LLCs with more than two members also often require unanimity for key decisions–a fertile field for deadlock.

[4] See also cases cited at footnote 27.  For example:  In re: GR BURGR LLC, 2017 WL 3669511, at *6 (Del. Ch. Aug. 25, 2017) (citing In re Arrow Inv. Advisors, 2008 WL 1101682, at *3 (Del. Ch. Apr. 23, 2009)); Mehra v. Teller, 2021 WL 300352 at *19 (Del. Ch. Jan. 29, 2021) (“serious managerial issues, such as strategic visions, major initiatives, and the operation and control of a company, will typically satisfy the qualitative requirements imposed by statute and common law for dissolution.”)  (citing Vila v. BVWebTires LLC, 2010 WL 3866098, at *7 (Del. Ch. Oct. 1, 2010)).

[5] Citing In re: GR BURGR, 2017 WL 3669511, at *6 (citing Meyer Nat. Foods LLC v. Duff, 2015 WL 3746283, at *3 (Del. Ch. June 4, 2015)); Accord Acela Invs. LLC v. DiFalco, 2019 WL 2158063, at *26 n. 276 (Del. Ch. May 17, 2019) (“In the context of a dissolution claim, ‘deadlock’ means disagreement and discord between the parties.”)

[6] Footnote 39 cited cases such as Haley v. Talcott, 864 A.2d 86 (Del. Ch. 2004) and In re:  GR BURGR, 2017 WL 3669511, at *7 (explaining dissolution is appropriate where there are no circumstances indicating that the parties would want to associate with each other in the future); In re Silver Leaf, L.L.C., 2005 WL 2045641, at *10 (Del. Ch. Aug. 18, 2005) (explaining a company that has a 50/50 ownership split and requires a majority for decisions cannot continue to function as a business where the two sides disagree on how to run it); In re:  GR BURGR, 2017 WL 3669511, at *6-7 (an unbreakable deadlock can form a basis for dissolution even if a company is still engaged in marginal operations, in a case involving two 50% owners).

[7] In support of that allegation being a factor in supporting a dissolution petition, the court cited cases such as Fisk Ventures, 2009 WL 73957, at *4 (finding dissolution appropriate given the parties’ history of discord and disagreement); Symbiont.io, Inc. v. Ipreo Hldgs., LLC, 2021 WL 3575709, at *58-59 (Del. Ch. Aug. 13, 2021) (explaining dissolution is appropriate where any suggestion the parties could work together to operate the business is a “fantasy”); and In re Shawe, 215 WL 4874733, at *26-28 (finding deadlock over issues including distributions to members, pursuit of acquisitions, expense true-ups to reconcile personal uses of company funds, and a hiring and retention of personnel).  See Slip op. at n. 41.

[8] The court cited another Court of Chancery decision that found dissolution proper in an LLC structure where the petitioner demonstrated an indisputable deadlock between to 50/50 members.  Slip. at 16 (citing Haley v. Talcot, 864 A.2d at 88-89) (referring to that case as finding dissolution appropriate between two 50/50 members of an LLC who created a business for mutual benefit and profit but:  “were deadlocked about the business strategy and future of the LLC”).

[9] See also footnote 55 citing a case explaining that even though some agreements may be entered into contemporaneously and will be reviewed together, one of those agreements may be considered subordinate to the other.

[10] Citing Haley, 864 A.2d at 95 (“When the agreement itself provides a fair opportunity for the dissenting member who disfavors the inertial status quo to exit and receive the fair market value of his interest, it is at least arguable that the limited liability company may still proceed to operate practicably under its contractual charter because the charter itself provides an equitable way to break the impasse”); Seokoh, 2021 WL 1197593, at *8 (explaining this court “has emphasized that a judicial decree of dissolution is typically inappropriate when the entity’s constitutive documents provide an equitable and effective means of overcoming the deadlock.”) (citations omitted) (emphasis supplied)); Vila, 2010 WL 3866098, at *8 (“Of course, the existence of a deadlock would not necessarily justify a dissolution if the LLC agreement provided a means to resolve it equitably.”) (citations omitted) (emphasis added)).

[11] The exit provision in the instant matter (and in the Doehler matter that this writer has appealed) does not provide a guaranteed exit at all. The court in Doehler viewed the exit mechanism in Doehler as an actual exit mechanism even though it gave the recipient of a offer to sell (offeree): the option of requiring the offeror to buy the interest in the LLC of the offeree–instead of allowing the offeror to sell and exit. Whether Doehler provided an equitable exit mechanism is an issue pending appeal before the Delaware Supreme Court.

[12] The court explained that in the Haley v. Talcott case, “even though the exit mechanism in that case allowed a member to sell his interest to the other member at fair market value, the court found in that case that the exit mechanism was not equitable because it did not allow the departing member to make a clean break, in light of personal liability on a bank guarantee and therefore, it was inequitable to force the member to use the exit mechanism . . . [and] was not an adequate remedy.”  Slip op. at 23.