The Court of Chancery may decree judicial dissolution of a Delaware limited liability company “whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” 6 Del. C. § 18-802.
Due to a lack of extensive case law interpreting Section 18-802, the court often looks to the analogous limited partnership dissolution statute. Wiggs v. Summit Midstream Partners, LLC, 2013 WL 1286180, at *12 (Del. Ch. Mar. 28, 2013). Two situations where the court has ordered dissolution are where there is deadlock that prevents an entity from operating and where the defined purpose of the entity is fulfilled or impossible to carry out. Id. However a recent case, Meyer Natural Foods LLC, provided for dissolution pursuant to Section 18-802 under circumstances where there was no deadlock and the LLC was theoretically still able to operate within the scope of its purpose clause.
“In evaluating whether the defined purpose of the entity is fulfilled or impossible to carry out, ‘the Court must assess whether it is reasonably practicable to carry on the business of [the] limited partnership, and not whether it is impossible.’” Id. (quoting Roth v. Laurus U.S. Fund, L.P., 2011 WL 808953, at *3 (Del. Ch. Feb. 25, 2011)). The court also looks at the purpose clause in the governing agreements and determines “the nature of the limited partnership’s business and whether the general partner can continue that business in accordance with the limited partnership agreement.” Id. (quoting Roth, 2011 WL 808953, at *3).
“Dissolution of an entity chartered for a broad business purpose remains possible upon a strong showing that a confluence of situationally specific adverse financial, market, product, managerial, or corporate governance circumstances make it nihilistic for the entity to continue.” Id. at *3. Furthermore, “a petitioner might obtain dissolution by making a convincing showing that the perpetuation of the entity, irrespective of its managers’ intentions to pursue a business line allowed by its governing instrument, was obviously futile and would not result in business success.” Id.
The right to seek judicial dissolution under Section 18-802 is not “required” by law. Huatuco, M.D. v. Satellite Healthcare and Satellite Dialysis of Tracy, LLC, 2013 WL 6460898, at *5 (Del. Ch. Dec. 9, 2013). In fact, “waiver of a contractual right to judicial dissolution, or enabling opting out of the statutory right altogether, is consistent with the broad policy of freedom of contract underlying the LLC Act, and comports with the Act’s approach of supplying default provisions around which members may contract if they so choose.” Id. (citing R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del. Ch. Aug. 19, 2008)).
In Haley v. Talcott, Matthew James Haley and Gregory L. Talcott were the only members of an LLC, each owning a 50% interest in the LLC. Haley v. Talcott, 864 A.2d 86, 87 (2004). Haley brought an action for summary judgment of his claim seeking dissolution of Matt and Greg Real Estate, LLC. Id. The court noted that Haley was limited to a contractually provided exit mechanism in the LLC Agreement, or dissolution under Section 18-802. Id. Arguing that the circumstances resembled corporate deadlock, Haley urged the court to utilize 8 Del. C. § 273, a provision of the Delaware General Corporation Law (“DGCL”) that provides for the dissolution of a deadlocked corporation, as a relevant parallel for analysis. Id. at 93.
The Chancery Court held that Section 18-802 plays a similar role for LLCs as Section 273 of the DGCL plays for joint venture corporations with only two stockholders. Id. “When a limited liability agreement provides for the company to be governed by its members, when there are only two members, and when those members are at permanent odds, § 273 provides relevant insight into what should happen.” Id.
The Haley court stated that Section 273 “sets forth three pre-requisites for a judicial order of dissolution: 1) the corporation must have 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.” Id. at 94. Importantly, the court noted that “the presence of a reasonable exit mechanism bears on the propriety of ordering dissolution under 6 Del. C. § 18-802.” Id. at 96. If the LLC Agreement itself provides a fair opportunity for the dissenting member to exit and receive the fair market value of his interest, it is at least arguable that the LLC may still proceed to operate practicably under its contractual charter because the charter provides an equitable way to break the impasse. Id. However, in this case, the court found that the exit mechanism provided by the LLC Agreement would not be equitable because Haley would still be obligated under a personal guaranty that he signed to secure a mortgage for the property owned by the LLC. Id. at 97-98. Thus, the court found that it was not reasonably practicable for the LLC to continue to carry on business in conformity with the LLC Agreement and ordered dissolution of the LLC under 6 Del. C. § 18-802. Id. at 98.
In Meyer, Petitioner Meyer Natural Foods LLC (“Meyer”) was the managing member and owner of a 51% capital interest in Premium Natural Beef LLC (“PNB”). Meyer Natural Foods LLC v. Duff, 2015 WL 3746283, at *1 (Del. Ch. June 4, 2015). The Respondents, Kirk Duff and Todd Duff (jointly, the “Duffs”) and C.R. Freeman (“Freeman” and together with the Duffs, the “Respondents”) owned the remaining capital interests in PNB. Id. Meyer requested judicial dissolution of PNB pursuant to Section 18-802 of the Delaware Limited Liability Company Act. Id.
The court noted that judicial dissolution has been granted “in situations where there was ‘deadlock’ that prevented the [entity] from operating and where the defined purpose of the entity was fulfilled or impossible to carry out.” Id. at 3 (quoting In re Seneca Investments LLC, 970 A.2d 259, 262-63 (Del. Ch. 2008) (footnote omitted)).
The court further stated that deadlock referred to the inability to make decisions and take action, for example, when an LLC agreement requires an unattainable voting threshold. Id. at 3 (citing Fisk Ventures, LLC v. Segal, 2009 WL 73957, at *4-5 (Del. Ch. Jan. 13, 2009), aff’d, 984 A.2d 124 (Del. 2009) (TABLE); In re Silver Leaf, L.L.C., 2005 WL 2045641, at *10-11 (Del. Ch. Aug. 18, 2005)). Additionally, the court said that “[w]hen analyzing purpose, the Court looks to the parties’ foundational contractual agreement and asks whether it is reasonably practicable to carry on the business in line with that purpose, not whether ‘the purpose . . . has been completely frustrated.’” Id. at 3 (quoting Fisk, 2009 WL 73957 at *4 (internal quotation marks omitted)).
The court reasoned that operational deadlock was not an issue because Meyer was the managing member with a 51% capital interest in PNB. Meyer Natural Foods LLC, 2015 WL 3746283 at *4. Therefore, it decided that the dispute centered around purpose. Id.
In this case, Meyer urged the court to consider various non-compete and mutual obligations set forth in a Purchase Agreement, the LLC Agreement, and an Output and Supply Agreement entered into by all the parties and executed contemporaneously. Id. The court reasoned that there was authority which limits analysis of an LLC’s purpose to the purpose clause in an organizational document, but that other authority suggested additional evidence might inform the analysis. Id. The court decided that “[a] sensible interpretation of precedent is that the purpose clause is of primary importance, but other evidence of purpose may be helpful as long as the Court is not asked to engage in speculation.” Id.
Thus, the court analyzed the purpose clause in the LLC Agreement, the Output and Supply Agreement, and the non-compete covenants in the Purchase Agreement. Meyer Natural Foods LLC, 2015 WL 3746283 at *4. It found that the purpose clause in the LLC Agreement was unambiguous and stated that PNB’s purpose was to market, distribute, and sell natural beef. Id. The court reasoned that the entirety of the parties’ agreement demonstrated that PNB was not intended to be a business where Meyer ran all of the operations and distributed profits to the Respondents as passive members. Id.
The court concluded that it was no longer reasonably practicable to operate PNB in line with the stated purpose of the LLC and that although there was no operational deadlock and PNB had earned profits in the previous year, PNB could not achieve its purpose when the Respondents did not believe the restrictive covenants in the Purchase Agreement applied to them and thought the Output and Supply Agreement had been terminated. Id. Additionally, even though the purpose of PNB was to operate a joint venture business based on a supply and distribution agreement, the Respondents no longer provided PNB with cattle in accordance with the Output and Supply Agreement and the Purchase Agreement. Id. at *5. Yet, all parties believed that the LLC Agreement continued to bind Meyer. Meyer Natural Foods LLC, 2015 WL 3746283 at *5.
Lastly, the court discussed a provision in the LLC Agreement which precluded Meyer from filing an action for dissolution absent prior written consent of a majority of the interests held by the other members. Id. Another provision in the LLC Agreement provided for dissolution upon an “entry of a decree of judicial dissolution” or “the determination of the Managing Member and a Majority in Interest of the other Members.” Id. Meyer argued that the contract could not trump the LLC Act and interpreted the LLC Agreement as allowing him to petition the court for judicial dissolution, but not to directly take steps to dissolve PNB or cause PNB to take its own steps toward dissolution. Id. The court accepted this reading and analysis of the LLC Agreement and recognized that some authority existed advising against strict interpretation of an LLC agreement where the result would be inequitable. Id. (citing Haley, 864 A.2d at 96-98).
Therefore, the court decided Meyer had made a prima facie case for dissolution. Meyer Natural Foods LLC, 2015 WL 3746283 at 5. The court found grounds for the dissolution of the LLC despite the fact that there was no deadlock (because Meyer owned a 51% interest in the LLC), there was an ongoing profitable company, the language of the LLC Agreement barred voluntary dissolution, the ability of the LLC to continue to operate within the scope of its purpose clause (at least in theory), and the fact that the court needed to look beyond the four corners of the agreement to explore the core purpose of the LLC. Moreover, the court considered other agreements that were entered into contemporaneously with the LLC Agreement by all the parties in connection with the formation of the LLC.