A recent Delaware Court of Chancery ruling is a gem, notwithstanding—or maybe because of—its brevity, that addresses the minimum allegations required to seek dissolution of a business entity, and deserves a place in the pantheon of Delaware decisions.  It presents itself to the world in the form of a short and humble Order that simply recites core principles while denying a motion to dismiss a petition for the dissolution of an LLC. It is a big win for acknowledging the nuanced dynamics of business relationships in a closely-held entity. 

In Walter v. McManus, C.A. No. 2024-0412-NAC, Order (Del. Ch. June 7, 2024), the Court restated several key principles of law regarding the dissolution of LLCs or corporations that I highlight below in bullet points.

[Initially, I note that among the most exemplary discussions of the minimum requirements for surviving a motion to dismiss a petition for dissolution of a business entity are those in the Chancery decision of T&S Hardwoods, highlighted on these pages.]

Highlights of other dissolution decisions on these pages over the last 20 years are available at this link.

Highlights of Walter v. McManus:

  • The first paragraph of the Order describes several “convincing” factors that support a judicial dissolution such as an operating agreement that gives no means of navigating around a deadlock, or the existence of a board level voting deadlock—but the Order wisely at least implies that there is no express per se requirement for a deadlock.
  • The Court astutely observed that: it is not necessary to suggest that the business must be “metaphorically ablaze to state a reasonably conceivable claim to dissolve.”
  • Importantly, the Court instructed that the counterpart corporate statute, DGCL Section 273, is often used by analogy to apply to dissolution cases under the LLC Act. The court sagely reasons that the corporate dissolution statute: “does not mandate that the parties struggle until they have destroyed their relationship entirely and jeopardized their business.”
  • Although it is not required to be so pled, the Court found it relevant that there was “grave risk to the business, even if it is entirely profitable, via a residual inertial status quo.”
  • Delaware law does not require a member to plead she made a performative proposal she knew would be dead-on-arrival as a predicate to seeking judicial resolution.” (citing Seokoh, 2021 WL 1197593, at * 11.) (also distinguishing Arrow, 2009 WL 1101682, as not based on deadlock.)
  • Both the T&S Hardwoods Chancery opinion described on these pages, and this decision demonstrate a sensitivity to the exigencies of the nuanced business dynamics in closely-held entities, and that recognition supports a standard that is more closely aligned to no-fault divorces, as opposed to some opinions at the trial-court level that have attempted to impose additional requirements that are not in the statute, but instead are akin to requiring a purity test in order to establish a deadlock.
  • Lastly, but perhaps of at least equal importance to other principles stated in this Order, is that it remains an insufficient basis to oppose dissolution if a party has an option to sell his interest to a third party, because it would be inequitable to force a party to exercise an option to sell, when that option to sell is entirely voluntary, as an alternative to dissolution.

It would exalt artifice over pragmatism to require talismanic or magic words to be used in pleadings, or to require pleadings that, figuratively speaking, must describe “someone’s hair on fire” in order for one’s investment to be freed from the bondage of a dysfunctional group of a few business owners