Search results for: section 273

In Xpress Management , Inc. v. Hot Wings International, Inc., (Del. Ch., May 30, 2007), read opinion here, the Chancery Court addressed a claim for dissolution of a joint venture pursuant to DGCL Section 273 in light of a prior-filed case in Canada involving similar issues with the same parties. Although under the familiar McWane [263 A.2d 281 (Del. 1970)] standard, the first-filed case is often given preference, the court emphasized that summary proceedings under the DGCL, such as Section 273, are often allowed to proceed as exceptions to the "first-filed" rule, based on the importance of expeditiously handling such cases even where prior-cases among the parties were already pending elsewhere. (see pg. 12). A perhaps determinative factor in the court’s opinion to stay this action pending the resolution of the Canadian litigation, is what the court described as the petitioner’s efforts to use his superior financial resources to use various litigations for less that honorable purposes, and the decision to use the Delaware courts only after losing twice in the Canadian courts.

 In addition, the court cited prior Delaware cases that supported a denial of relief under Section 273 when dissolution was sought perhaps in order to allow one party to usurp a corporate opportunity that would not otherwise be available to one of the parties if the corporation were not dissolved  [query if the same reasoning could be used under other dissolution statutes].

Here is a key quote from the opinion:

 "As Xpress observes, the fact that another litigation involving the parties is proceeding elsewhere, generally speaking, should not prevent a joint venturer from exercising its statutory rights under section 273.

25 However, relevant precedent is clear that when the other party can point to uncontested facts which raise a specter of bad faith conduct by the party seeking dissolution, the Court of Chancery’s inherent equitable discretion should not stand idle. Indeed, this court cannot permit a litigant to manipulate the statutory process embodied in section 273 with an eye towards “exploit[ing] a specific future business opportunity personally that would rightfully belong to the company if it should happen to continue to exist as a going concern at that future time.”26   [Data Processing, 1987 WL 25360, at *4.]"

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

For the 14th year, we provide a list of key Delaware corporate and commercial decisions from the prior year. This year, our list is co-authored by Chauna Abner in addition to yours truly, and appeared in the following article published in the Delaware Business Court Insider on January 2, 2019:

For the 14th year, we have created an annual list of important corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list is not by any means a complete list of important decisions of the two courts that were rendered this year. Instead, this list includes notable decisions that should be of widespread relevance to those who work in the corporate and commercial litigation field or follow the latest developments in this area of Delaware law. Prior annual reviews are available at this hyperlink. This list focuses on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications.

Delaware Supreme Court Decisions

  • Aranda v. Phillip Morris USA, 183 A.3d 1245 (Del. 2018).

This Supreme Court decision should be required reading for anyone who has a forum non conveniens issue in Delaware. The opinion provides an overview of the Delaware law on forum non conveniens and clarifies that even if it is a minority view among the 50 states, Delaware only requires that the trial court “consider” whether an alternative forum is available as part of its analysis, and whether an alternative forum is available is not a deciding factor. In its analysis, the court explores three general categories of forum non conveniens cases. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Eagle Force Holdings v. Campbell, 187 A.3d 1209 (Del. 2018).

For the first time, the Delaware Supreme Court clarifies the test to determine whether a contract’s terms are sufficiently definite to create an enforceable contract. Before setting forth the test, this opinion discusses the intent necessary for parties to be bound. This opinion also explains the three basic requirements for a valid contract and addresses the ancillary issue of whether the Court of Chancery could impose sanctions for violation of a court order prior to establishing that it had personal jurisdiction over the person who violated the order. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Morrison v. Berry, 191 A.3d 268 (Del. 2018).

In this opinion, Delaware’s highest court limits the application of the Corwin doctrine and prohibits the cleansing effect of stockholder approval, in part due to inadequate disclosures. The opinion also explains the various nuances of the board’s duty of disclosure to stockholders, describes the duty of candor owed by directors to each other, and provides a definition of materiality as well as an explanation of when an omitted fact is material. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Flood v. Synutra International, 2018 Del. LEXIS 460 (Del. Oct. 9, 2018).

In this opinion with a vigorous dissent, the Supreme Court clarifies the MFW standard that was announced in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014). The court explains whether the prerequisites that must be satisfied for the MFW standard to apply must be imposed as a condition of the deal at the absolute beginning of negotiations. The opinion also discusses whether due care violations were pleaded in the complaint. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

Delaware Court of Chancery Decisions

  • KT4 Partners v. Palantir Technologies, 2018 Del. Ch. LEXIS 59 (Del. Ch. Feb. 22, 2018).

The Court of Chancery determined that a stockholder satisfied the prerequisites of Section 220 in this case to obtain certain corporate records. This 50-page decision can serve as a primer for the requirements of Section 220, to which judicial opinions have added prerequisites that are not found in the text of the statute. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Feldman v. YIDL Trust, 2018 Del. Ch. LEXIS 75 (Del. Ch. Mar. 5, 2018).

In this opinion, the Court of Chancery adds to the relatively modest body of case law interpreting Section 273 of the DGCL. The court applies Section 273 to dissolve a joint venture with two 50/50 stockholders that was deadlocked. This is analogous to a “no fault business divorce” but the remedy is discretionary and the court will not always grant dissolution. A synopsis of the decision and a link to the full opinion are available at this hyperlink. Shortly after the court issued its decision, the respondent moved for relief from the court’s entry of judgment and the court denied the motion. See Feldman v. YIDL Trust, 2018 Del. Ch. LEXIS 148 (Del. Ch. May 4, 2018).

  • PR Acquisitions v. Midland Funding, 2018 Del. Ch. LEXIS 137 (Del. Ch. Apr. 30, 2018).

This Chancery decision is notable for enforcing the provisions in an agreement that provided a procedure and a comparatively short deadline for making claims for funds held in escrow. This decision was in the context of notice being mistakenly sent to the escrow agent when the agreement required that notice be sent to the seller. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • CBS v. National Amusements, 2018 Del. Ch. LEXIS 157 (Del. Ch. May 17, 2018).

In this high profile case, the Court of Chancery denies the request of CBS, a minority shareholder, for a TRO that sought to prevent the efforts of the Redstone family from exercising its voting control regarding a potential deal with Viacom. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Basho Technologies Holdco B v. Georgetown Basho Investors, 2018 Del. Ch. LEXIS 222 (Del. Ch. July 6, 2018).

This 126-page Court of Chancery opinion is a mini-treatise on the capacious capacity of the court to fashion creative and customized remedies when a breach of fiduciary duty is found. The opinion includes many key principles of Delaware corporate law and a description of different types of available remedies. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • In Re Oxbow Carbon Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. Aug. 1, 2018).

In this opinion, the Court of Chancery provides the most comprehensive description of the broad and flexible authority of the Court of Chancery to fashion an appropriate customized equitable remedy in several decades. This decision should be treated as an indispensable reference for those involved in corporate or commercial litigation who might need to quote authoritative sources for the voluminous scope of the Court of Chancery’s flexible and customized equitable remedial powers. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Applied Energetics v. Farley, 2018 Del. Ch. LEXIS 277 (Del. Ch. Aug. 14, 2018).

This Court of Chancery opinion is a must read for litigators who need to know the finer points of how the amount for a requisite bond is determined for purposes of obtaining an injunction. The court found problems with both parties’ estimates and essentially engaged in an abbreviated analysis of the appropriate measure of potential damages based on the claims in the case. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Godden v. Franco, 2018 Del. Ch. LEXIS 283 (Del. Ch. Aug. 21, 2018).

In this opinion, the Court of Chancery explains several important principles that Delaware courts use to analyze issues in the LLC context, and interpretive rules involving LLC agreements. In doing so, the court provides a helpful analysis of the equitable powers of the court to fashion remedies in the context of an LLC—notwithstanding the often exaggerated explanation of LLCs as creatures of contract. In this vein, the court cites several exceptions to the concept of LLCs being purely a product of contract. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Akorn v. Fresenius Kabi AG, 2018 Del. Ch. LEXIS 325 (Oct. 1, 2018), aff’d, 2018 Del. LEXIS 548 (Del. Dec. 7, 2018).

This epic 246-page Court of Chancery opinion serves as a mini-treatise on several topics of importance to corporate and commercial litigators, including: interpretation of material adverse change clauses or material adverse effect clauses in merger agreements; and the meaning and application of the phrase “commercially reasonable efforts” or “reasonable best efforts” often found in merger agreements. A synopsis of the decision and a link to the full opinion are available at this hyperlink. Notably, the Supreme Court affirmed the decision in a three-page order in December.

  • Lexington Services v. U.S. Patent No. 8019807 Delegate, 2018 Del. Ch. LEXIS 509 (Del. Ch. Oct. 26, 2018).

In this opinion, the Court of Chancery recognizes that a non-signatory to an agreement may enforce the provisions of a forum-selection clause under certain conditions. In doing so, the court discusses two principles of well-established Delaware law: the general enforceability of forum-selection clauses in Delaware; and the ability of officers and directors of an entity subject to a forum-selection clause to invoke its benefits when they were closely involved in the creation of the entity and were being sued as a result of acts that directly implicated the negotiation of the agreement that led to the entity’s creation. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Decco U.S. Post-Harvest v. MirTech, 2018 Del. Ch. LEXIS 545 (Del. Ch. Nov. 28, 2018).

This Court of Chancery opinion adds to the modest body of Delaware case law that addresses whether an LLC should be dissolved based on the statutory standard that it is “not reasonably practicable” to carry on the LLC. The court explains that in determining the purpose for which an LLC was formed, it may not only look at the purpose-clause in the LLC’s operating agreement, but also to “other evidence … as long as the court is not asked to engage in speculation.” A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018).

This recent seminal decision of the Court of Chancery must be included in the lexicon of every lawyer who wants to understand the boundaries of Delaware law on forum-selection clauses in corporate documents. The court determined that a forum-selection clause in a certificate of incorporation was invalid and ineffective to the extent that it purported to “require any claim under the Securities Act of 1933 to be brought in federal court” (the “Federal-Forum Provisions”). A synopsis of this decision and a link to the full opinion are available at this hyperlink.

Francis G.X. Pileggi is a litigation partner and vice-chair of the commercial litigation practice group at Eckert Seamans Cherin & Mellott. Contact him at fpileggi@eckertseamans.com. He comments on key corporate and commercial decisions and legal ethics rulings at www.delawarelitigation.com.

Chauna A. Abner is an associate in the firm’s commercial litigation practice group.

Supplement: Prof. Stephen Bainbridge, a nationally-prominent corporate law scholar, kindly linked to this post and described it as: “a must read for anybody working in corporate law.”

The above post originally was published as an article, and is reprinted with permission from the Jan. 2, 2019 edition of the Delaware Business Court Insider(c). 2019 ALM Media Properties, LLC. All rights reserved.

Delaware law allows for a summary proceeding to seek a quick business divorce in certain circumstances. Section 273 of the Delaware General Corporation Law (DGCL) allows for, in essence, a no-fault business divorce if the criteria of the statute are met. Those requirements are that: (i) there are two 50/50 stockholders; (ii) they must be engaged in a joint venture; and (iii) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets. If those prerequisites are met, one of the 50% stockholders can file a petition to dissolve the corporation and request the appointment of a receiver. If the opposing party cannot agree within three months to a plan of dissolution, the court may then take action to appoint a receiver to oversee the dissolution.

Feldman v. YIDL Trust, C.A. No. 2017-0253-AGB (Del. Ch., Mar. 5, 2018), adds to the relatively modest body of case law interpreting Section 273, compared to other sections of the DGCL, but this recent decision of the Court of Chancery provides a helpful addition to this niche of Delaware jurisprudence and explains a set of circumstances that will satisfy the statutory prerequisites for this type of business divorce. As the court instructed:

“The purpose of the statute is to afford relief where the corporation’s two equal shareholders are deadlocked and cannot agree upon whether the joint venture should be continued and how the corporation’s assets should be disposed of.”28 “[W]hile Section 273 recognizes a power in this court to deny a petition that satisfies its minimum standards, such power should be sparingly exercised.”29 “Once the requirements of § 273 are met, the exercise of such discretion is limited to a determination of whether or not a bona fide inability to agree exists between the two shareholders.”30

The sole corporate asset was a boat, and the only two directors were not able to get along. As the court described the key facts: “… they have disagreed about the proper use of the Boat and the allocation of costs and expenses associated with ownership and maintenance of the Boat.” The court further reasoned, in the context of granting the motion for summary judgment to appoint a receiver, that the two 50/50 stockholders:

indisputably have been engaged in a joint venture (owning the Boat) since January 2016 and, as noted above, there is no dispute that they have been unable to agree as to the continued operation of the Company or how to dispose of its sole asset. Although the Trust disputes Benjamin’s ownership of 50% of Royston, I find for the reasons explained below that there are no genuine issues of fact as to his ownership.

About a dozen prior Delaware decisions applying Section 273 have been highlighted on these pages over the last 13 years. In some of those cases, the 50/50 ownership requirement was not satisfied, for example. In others, the Court determined that there was not a sufficient impasse. Analogous cases involving LLCs have been covered as well. Ultimately, the Court has discretion in this version of corporation litigation regarding whether or not to grant the relief requested.

In The Matter of Bermor, Inc., C.A. No. 8401-VCL (Del. Ch. Feb. 9, 2015).  This Delaware Court of Chancery opinion is noteworthy for its pithy analysis of a petition to dissolve a deadlocked corporation pursuant to DGCL Section 273, which is a statutory provision that empowers the Court with discretion to dissolve a corporation when it has two 50/50 stockholders who are deadlocked. Many Section 273 cases involve complicated facts and denials of requests for dissolution if the court does not believe the statutory requirements are met. In this case, the general partners of limited partnerships were corporations that were owned 50% each by two individuals. The general partners managed the real estate owned by the LPs. One 50% owner of the corporate general partner wanted liquidity more than the other. They could not agree on how to resolve their different goals for the entities.

This decision provides a succinct and exemplary explanation of the prerequisites of Section 273 and why they were satisfied based on the facts of this case. Must reading for anyone who needs to understand the latest Delaware law on Section 273.

This decision should also win an award for the most succinct Chancery opinion in years. It includes a thorough analysis and cogent reasoning in the fewest number of pages possible. By comparison with typical Chancery decisions that are often 50 pages or more, the length of this decision is the proportionate equivalent of a synopsis–yet it does not lack completeness.  In this post-trial opinion, the Court rejected the argument that there was something other than a good faith basis to request dissolution.

McElroy v. Schornstein, C.A. No. 7233-CS (Del. Ch. June 20, 2012).

Issue Addressed: Whether summary proceedings for dissolution under 8 Del. C. § 273 should be permitted to proceed as an exception to the first-filed rule under the McWane doctrine, in light of related actions outside of Delaware addressing Delaware issues.

Short Answer: Not under the circumstances of this case.  Motion to Dismiss granted. Hat tip to Delaware corporate litigator Kurt Heyman for forwarding this case to me.

Background

This action was filed pursuant to DGCL Section 273 seeking judicial dissolution of a business that was owned by two 50% shareholders.  Section 273 allows for a summary proceeding in the nature of a “no-fault business divorce” when there is a deadlock between two 50/50 shareholders.  Curiously, one of the parties previously filed a separate but similar action in New Jersey several months earlier.  The first-filed rule, also known as the McWane doctrine, generally allows the court to exercise discretion to stay or dismiss a second-filed case in favor a prior action pending elsewhere in a court capable of doing prompt and complete justice involving the same parties and the same issues.  An exception to that rule is when a summary statutory proceeding, such as one under Section 273, is filed as a “second action.”  See cases cited at footnote 3. 

The exception to the first-filed rule for summary proceedings is based on the theory that Delaware is the more appropriate forum, when a component of multi-forum litigation involves a summary proceeding, because Delaware has a strong interest in resolving issues concerning the internal affairs of a Delaware corporation promptly and efficiently.  See cases cited at footnote 9.

An important factor here was that the prior filed action in New Jersey resulted in an Order entered by the New Jersey Court that regulated the conduct of the parties and imposed restrictions on the activities of the parties during the pendency of that action. 

Analysis

The Court of Chancery determined that the motion to dismiss the Section 273 summary proceeding should be granted for several reasons.  First, the prior filed action in New Jersey involved substantially the same issues that would need to be determined in Delaware, and the New Jersey Court already entered an order addressing several of those issues, at least preliminarily. 

The Court of Chancery also determined that the attempt by McElroy to proceed in Delaware was undercut by his filing of yet another action in California, the outcome of which would affect the actions of any receiver that might be appointed in Delaware in connection with the dissolution.  Proceeding with the dissolution in Delaware and appointing a Delaware receiver would also interfere with the order that was already issued in New Jersey.

In light of the pending actions in both New Jersey and California involving the same parties and related issues, the Court concluded with reasoning that is eminently quotable:

“Three-ring circuses may delight children at Barnum & Bailey, but in this context, they create the sort of inefficiency, complication, and sheer waste McWane addresses.”

In Achaian, Inc. v. Leemon Family LLC, C. A. No. 6261-CS (Del. Ch. Aug. 10, 2011), read opinion here, the Delaware Court of Chancery issued today a pithy opinion on LLC law that is destined to be cited often regarding the transferability of the interests of members in an LLC, and related interpretations of the Delaware Limited Liability Company Act (the “Act”).

Issue Addressed: The Court formulated the key issue it addressed as follows: “may one member of a Delaware limited liability company assign its entire membership interest, including that interest’s voting rights, to another existing member, notwithstanding the fact that the limited liability company agreement requires the affirmative consent of all of the members upon the admission of a new member, or, must the existing member assignee be readmitted with respect to each additional interest it acquires after its initial admission as a member?”

Holding: In its own words the Court concluded that: “When Omniglow’s LLC Agreement is read as a whole, as it must be, it allows an existing Member to transfer its entire Membership Interest, including voting rights, to another existing Member without obtaining the other Members’ consent. Thus Holland’s assignment of its 30% Interest to an existing Member, Achaian, was effective to vest all of the rights associated with that Interest in Achaian, and Omniglow now has two cooequal Members.”

Amusing Note: Footnote 54 of the opinion features a citation to a song by the Commodores, (pictured above), called Three Time a Lady. The citation was in the context of repudiating the argument of the defendant, which would have required an already admitted member to “become once, twice (or even three times)” a member each and every time that member acquired an additional block of interests in the LLC.

Short Overview of Legal Analysis

Though I expect to supplement this short blurb with commentary by some of the LLC scholars cited in the opinion, in the meantime, I will provide a few selected bullet points.

  • The Court began its analysis with what it referred to as the “now mundane notion” that under the Act, the parties to an LLC agreement have substantial authority to shape their own affairs and that in general, any conflict between the provisions of the Act and an LLC agreement, will be resolved in favor of the LLC agreement”. See footnotes 10 and 11 (voluminous references to treatises and learned commentary on the topic.)
  • The Court recited the primary purpose of the Act as being “to fill gaps, if any, in an LLC agreement”. In this case, because the LLC agreement addressed the issue at hand, that was the starting point in the analysis. The agreement in this case made the LLC interests of members freely transferrable to other members.
  • The Court also added to the growing case law on the statutory interpretation of Section 18-802 of the Act which allows the Court to dissolve an LLC when: “… it is no longer reasonably practicable to carry on [the LLC’s] business in conformity with [the LLC agreement].”
  • Based on the holding relating to transferrability, which resulted in ownership of the LLC being equally split between two 50/50 members, the Court cited to prior Chancery decisions that have applied DGCL Section 273 by analogy. Section 273 allows for one to petition the Court for what in essence is a “no fault divorce/dissolution” when a joint venture is equally owned 50/50 by two parties. In that situation, applicable by analogy in this LLC case, the three prerequisites are: (1) There must be “two 50% stockholders; (2) those stockholders must be engaged in a joint venture; and (3) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets.”

SUPPLEMENT: Professor Larry Ribstein, whose treatise on LLCs was cited and relied on by the Court in the above opinion, provides his usual learned insights here and explains why he disagrees with the result reached by the Chancellor.

Postscript: Thanks to Delaware litigator Jody Pinckney for forwarding this opinion to me.

Vila v. BVWebTies LLC, C.A. No. 4308-VCS (Del. Ch. Oct. 1, 2010), read opinion here.

Brief Overview

This opinion adds needed depth to the case law on Section 18-802 of the Delaware LLC Act which allows a member of an LLC to seek dissolution when it is not “reasonably practicable” to continue to operate an LLC in conformity with its LLC Agreement. In this case, there were only two managers, and those two managers needed to agree on any decisions of the LLC. The Court concluded that when the consent of equal owners is required for any company action and they are deadlocked as to the future direction or management of the enterprise, and the LLC Agreement provides no mechanism by which to break the deadlock, “it is not reasonably practicable for the LLC to operate consistently with its Operating Agreement, and a judicial dissolution will be ordered.”


Background and Legal Analysis

This LLC involved the home improvement celebrity, Bob Vila, who formed a website that offered home improvement advice as well as product suggestions and related online assistance. He entered into the online venture with a businessman named George Hill in February of 2000. Initially, the major investor and the major advertiser on the site was Sears Roebuck. Although Vila and Hill each owned 49%, a trust owned the remaining 2%. Importantly, Vila and Hill were the only two managers and their affirmative vote was required in order for any decision regarding the course of the business.

The intellectual property connected with Vila was the subject of a License Agreement which could be terminated at any time for any reason or for no reason.

In the year 2007, the entity that owned the website (“WebTies”) suffered a dual setback at a time when the overall American economy was entering a deep recession and the housing bubble was about to burst. At that time, the syndicated television show that starred Vila, which was a primary source of video clips on the website and a source of broad exposure that sparked the interest of advertisers, was cancelled. During the same year, the largest advertiser on the site, Sears Roebuck, also ceased its advertising. At that time, Vila decided to focus more on WebTies. However, Vila and Hill could not agree on the future direction of the company.

Hill wanted to maintain a small and lean operation with only a handful of employees operating out of a small office in Boston. By contrast, Vila wanted to move the office to New York City and hire a Harvard MBA to put the company on a more aggressive growth plan.

The dispute came to a head in early 2009 when Vila filed suit in Delaware seeking dissolution pursuant to 6 Del. C. Section 18-802.

Pursuant to Section 18-802, a judicial decree of dissolution of a Delaware LLC is not an entitlement, but is within the discretion of the Court to grant, when, by a preponderance of the evidence: (i) a member or a manager; (ii) demonstrates that it is “not reasonably practicable to carry on the business in conformity with a Limited Liability Company Agreement.”

At the trial of this case, Vila made two arguments why it was “not reasonably practicable” to carry on the WebTies business in conformity with the LLC Agreement. First, the argument was that WebTies was formed for the purpose of developing and operating a website called BobVila.com and that based on Vila’s decision to terminate the license agreement, it was impossible for WebTies to function in accordance with its contractually stated objective. The second argument was based on the fact that the LLC Agreement required the consent of both managers for any decisions, but that Hill had unilaterally given himself decisionmaking authority over a strategy that Vila strongly opposed.

Hill responded, unpersuasively, that the business should be allowed to proceed because it is earning a modest profit and so, he argued, it is reasonably practicable to continue its existence. The Court also framed the argument of Hill, somewhat in disbelief, that if one manager of an LLC required to be governed by the mutual agreement of all the managers, is unilaterally directing the business and no disaster has occurred, the business can proceed in accordance with the LLC Agreement despite the fact that the manager has claimed for himself authority that is required to be exercised jointly under the agreement.

The Court cited at footnotes 48 and 49 many other cases that have used Section 273 of the DGCL to support dissolution of a joint venture when two coequal shareholders face a deadlock, on the theory that a deadlocked management board is a quintessential example of a situation justifying a judicial dissolution.

Although the number of cases interpreting the phrase “reasonably practicable” in this context is increasing, because of the comparative paucity of such cases when compared with similar provisions under the DGCL, this opinion has substantial importance for its application and amplification of that statutory language. Analogizing to Section 273 of the DGLC, the Court in this opinion reasoned that:

“When an LLC Agreement requires that there be agreement between two managers for business decisions to be made, [when] 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 business ‘in conformity with its Limited Liability Company Agreement.’” (emphasis added.) See footnote 51.

The Court found after trial that it was indisputable that Vila and Hill were deadlocked over serious managerial issues and the uncontradicted evidence established that Vila and Hill were unable to agree on the strategic vision for the current operation of WebTies, the entity that owned their online business.

In addition, the opinion observed that: “They have disagreed on several major initiatives, the strategic direction and capitalization of WebTies, and important operational decisions, including failing to reach an agreement on renewing the company’s office lease, with the result that the company operates out of cyberspace, ad hoc office suites, and coffee shops. Both Vila and Hill agreed that they have not communicated directly with each other for nearly two years since this lawsuit was filed in early 2009.” Moreover, the Court concluded that “it is silly to think that WebTies can continue to operate BobVila.com.”

The Court rejected the argument of Hill that he should be able to continue the business because he is making a profit. Also, the Court emphasized that Vila “did not sign up for such a business strategy and, in any event, does not support it.” The Court added that Hill’s defense of this case “suggests that Hill had a playground sense of his rights. According to Hill, he called ‘LLC’ and was entitled, in the face of drastic changes in the business circumstances facing WebTies, to continue WebTies on an inertial path even when his co-manager Vila adamantly disagreed.”

The Court cited cases in footnote 58 that rejected the notion that one co-equal fiduciary may ignore the entity’s governing agreement and declare himself the sole “decider.” See, e.g., Haley v. Talcott, 864 A.2d at 91-92, which granted dissolution when one co-owner of a restaurant forbade the other from physically entering the restaurant premises after changing the locks.

One might summarize the reasoning of the Court (as supported by the cases cited in the footnotes), as suggesting that in this situation involving co-equal owners or co-equal managers, one of those co-equal managers cannot simply lock out the other or operate the business without the consent of the other, but if such an attempt is made, it would provide a persuasive basis for dissolution.

By contrast, or by comparison, the Court cited to cases at footnote 62 which involved a deadlock that did not necessarily justify a dissolution if the LLC Agreement provided a means to resolve the impasse in an equitable manner.

Although Hill presented counterclaims, the Court regarded them as “thinly pled” and observed that Hill “did little at trial to try to prove [them]”. The Court also described some of the counterclaim arguments as coming “with ill grace.” Nonetheless, the Court carefully analyzed before rejecting arguments in the counterclaims such as acquiescence, waiver, and estoppel. See, e.g., footnotes 68, 72 and 73.

Importantly, the Court rejected fiduciary duty claims that were based on conduct specifically allowed by the LLC Agreement. Citing cases at footnote 88, the Court emphasized that fiduciary duty claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous because it is a well settled principle that where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim.

The Court appointed a liquidating trustee with the broadest possible fiduciary powers to wrap up the affairs of the company in a responsible manner that preserves value for members while honoring the legal obligations of the company that it owes to others. Although Hill refused to tender a name to serve as a liquidating trustee, Vila tendered the name of Martin T. Mand, a business executive and arbitrator who has successfully handled this role before when appointed by the Court. See footnote 91.

The Court appointed a prominent Delaware lawyer as the attorney for the liquidating trustee and tasked them with preparing an initial proposal for an order of appointment that gives Mand “the broadest authority consistent with the Delaware Limited Liability Company Act to decide how to dissolve the company and to wrap up its affairs.” The Court also added that Mand “should be empowered broadly to act under a business judgment rule standard if the [LLC] Act so permits.” (Referring to Section 18-406 of the LLC Act which provides that a liquidating trustee shall be exculpated from liability for a decision involving the disposition of the LLC’s assets made in good faith reliance on the LLC’s records, reports and information.)

The Court acknowledged the lengthy proceedings that have transpired thus far in this case, and emphasized that “pleas by either Hill or Vila for a lengthy winding-up or auction process will not be indulged.” Moreover, because Vila had the right to terminate the Licensing Agreement for any reason or no reason, the Court made it clear that it had little patience for any arguments that the business still owned the intellectual property.

If I can obtain a copy of the implementing order for the appointment of the liquidating trustee, I will attempt to post it as a supplement to this brief case summary.

In re: 14 Realty Corp., No. 20129-VCS (Del. Ch., August 5, 2009),  read opinion here.

This 30-page letter decision reviews de novo the determinations of a Trustee who was appointed to oversee the winding-up of a corporation.

Overview

This litigation began as a dissolution proceeding pursuant to DGCL Section 273 due to the sibling owners being deadlocked. The court granted dissolution and appointed a trustee to windup the affairs of the dissolving company and pursuant to that appointment signed an Order that set forth the powers and duties of the trustee in connection with winding up the affairs of the dissolving company.

Summary of Decision

The court reviewed the objections to the determinations of the trustee based on a de novo standard. However, in footnote 3, the court described that choice of a standard of review as follows: “This was a regrettable choice of review standard and not one I will sanction in my future orders. As this case amply demonstrates, de novo review of the determinations of a skilled and experienced trustee is duplicative and wasteful of judicial resources and parties’ time and money. Were the standard of review closer to a business judgment standard – – as it should have been – – this motion could have been decided far more expeditiously and efficiently on the basis of the trustee’s well reasoned determinations.” The trustee appointed in this matter was a retired Delaware Supreme Court Justice.

The court reviews the extensive factual background as part of its decision, but those detailed and extensive facts are beyond the scope of this short blog summary.

The point of this case, in which the court affirmed the determinations of a trustee appointed to oversee the winding up of a dissolved corporation, is that one should be careful to provide for a standard of review for a trustee’s determination in a dissolution matter that is "closer to a business judgment standard" in order to avoid what the court described in this opinion as a duplicative and wasteful review process by the court.
 

 

 

Though this blog focuses on Delaware decisions addressing business law topics, there are not nearly as many decisions on some parts of the relatively recent LLC statutes–compared with the bountiful case law on the DGCL. Thus, when a court of another state interprets those Delaware statutes it is worth a reference. See, e.g., Horning case I summarized here . [Aside: yes, I am trying to catch up on the regular tide of Delaware decisions, but my schedule lately has been very, very busy. This post happens to be on a topic I am working on for a pending case.]

In Trump v. Cheng, (NY Supr. Ct., NY Cty), 2006 LEXIS 2465, read opinion here, the  NY trial court interpreted Section 17-802 of the Delaware Limited Partnership Act relating to a basis for the Court to order forced dissolution. The Delaware LLC Act has an analogous provision at Section 18-802. The reasoning applied to the LP statute applies at least by analogy to the very similar LLC statute. Many issues were addressed in the Trump case, but at the end of the opinion, the NY court addressed whether there was a basis to order dissolution pursuant to the statutory language that allows for judicial dissolution if

"…it is not reasonably practicable to carry on the business in conformity with the partnership agreement…"

[If one substitutes LLC agreement for partnership agreement, the LLC statute is nearly identical].

So, what does that statute mean in real life for a party seeking or opposing forced dissolution for a profitable, ongoing business due to dissension or even deadlock among members?

Any reader who has an informed view on the issue is welcome to comment on this post or send me an email at fpileggi@foxrothschild.com, especially in light of the Delaware cases discussed below ( after a short summary of the relevant part of the Trump case.)

My reading of the cases is that no Delaware decision interpreting the LP or the LLC dissolution provision has forced the dissolution of a profitable, viable ongoing LLC merely due to dissension–or even alleged deadlock. This Trump decision is consistent with my view of the other cases discussed below. (Another New York decision, the Horning case, supra, did not think dissension alone was enough either.)

The NY court in the Trump case reasoned that "Trump failed to point to specific facts on which the Court may determine that the business is no longer reasonably practicable to continue." (citing to several Delaware cases interpreting that section, such as Cincinnati Bell, 1996 WL 506906 *9(Del.Ch.);  and PC Tower, 1989 WL 63901 *6 (Del. Ch. 1989)(dissolution ordered where business not viable and debt far exceeded assets)).  Trump admitted to receiving a large return on his investment and there was nothing in the governing agreement that required that the real estate investment entity at issue, distribute its profits or dissolve upon the sale of major assets, as Trump wanted done.

The Trump court also cited to the Delaware Chancery Court’s decision in Haley v. Talcott, 864 A.2d. 86, 89 (Del. Ch. 2004), read opinion here, which was summarized on this blog here. I suggest that Haley was not decided on the basis of Section 18-802 but rather that court relied for its decision on Section 273 of the DGCL , by analogous reasoning. That statute is expressly limited to a situation where there are 2 shareholders only, each owning 50/50 interests in the entity. The Haley case also involved a real estate holding company. The parties’ agreement did not provide for an equitable "exit mechanism" in the Chancery Court’s view. 

What if there is "no agreed upon exit mechanism" and ownership other than a 50/50 split by 2 members? Then how does the statute apply?

The only other Delaware decision to address Section 18-802 regarding forced dissolution of an LLC is the Chancery Court’s decision in the Silver Leaf case, summarized here  on this blog, but I argue that the Silver Leaf case is not helpful to one analyzing whether the statute can be used to force the dissolution of a profitable LLC that is continuing to function and profit despite dissension in the closely-held membership. The Silver Leaf case involved an entity that was not viable, not profitable, and in the view of the court, its entire business model was a sham. Thus, this case is not helpful in applying Section 18-802 to a profitable, viable, ongoing business, where one of the parties simply is not happy and "wants out". 

 The Horning case, supra, provides a thorough explanation of why the LLC statute might make it harder for one person to force a dissolution, absent an agreement providing for it. The suggestion in that case is that, unlike the corporate statute, the LLC statute was based on an original goal to make it harder to used Limited Partnerships as a sham to avoid estate taxes and the LLC statute was modeled in part on the LP statute.

Notably, the LLC statute does not have some of the provisions in the DGCL that allow for judicial dissolution upon a deadlock, such as Section 273, as  referenced in the Haley case, supra. So too, some cases refer to the inherent equitable power of the court to dissolve a corporation in extreme cases of fraud, for example– but is that equally applicable in the LLC context? Should it be, especially in Delaware where the LLC is considered to start with a "blank slate" that the parties are free to fashion in their own image with almost unlimited flexibility, by agreement, according to their purpose for their LLC? (But what if there are no applicable terms of an agreement?)

 See generally the recent Chancery Court decision in Carlson v. Hallinan, summarized here. In Carlson the court described the extreme circumstances required to appoint a receiver of solvent corporation–mere dissension is not enough. Should that reasoning apply also to an LLC? If dissension is not enough, what about a deadlock? How bad does the deadlock need to be if the business is profitable and doing fine on a daily basis?

Comments are welcome.

Full disclosure: I am in the middle of a case in which the LLC statute’s dissolution provision is hotly contested.