United States: Involuntary Dissolution Of Delaware Alternative Entities: The "Not Reasonably Practicable To Carry On The Business" Standard (Part III)

When will the Court grant dissolution of an LLC? In prior posts, we discussed the "not reasonably practicable to carry on the business" standard set forth under 6 Del. C. § 18-802 for the involuntary dissolution of a Delaware LLC, and highlighted decisions in which such dissolution requests were denied.  This post will analyze several Delaware cases in which the Court granted a petition to dissolve an LLC.

Analysis

In the case of In re Silver Leaf, LLC, C.A. No. 4091-VCS, 2005 WL 2045641 (Del. Ch. Aug. 18, 2005), the Court granted a petition to dissolve the LLC, Silver Leaf.  There, the LLC was comprised of three members.  The company was deadlocked as the contending interests were split 50/50.  Moreover, the operating agreement required majority consent, and provided no mechanism for breaking an impasse between the parties.  In addition, the Court found that certain of the parties had engaged in conduct in violation of the operating agreement.

Further, the Court looked to the business of Silver Leaf, and found that it was formed for the specific purpose of "marketing the vending machines of Tasty Fries", and no evidence was provided that the company was formed for any other purpose.  The Court concluded that the specific purpose for which Silver Leaf had been formed could not be accomplished.  Thus, the Court found that dissolution was warranted.

Another case in which the Court of Chancery ordered judicial dissolution of an LLC was in the matter of Haley v. Talcott, 864 A.2d 86 (Del. Ch. 2004).  In that action, the Court ordered dissolution because there was "indisputable deadlock between the two 50% members of the LLC".  Id. at 89.  Of note, the member objecting to the dissolution (Talcott) argued that dissolution was not warranted because the operating agreement provided for a viable exit strategy.  The Court agreed that "[i]f an equitable alternative to continued deadlock had been specified in the LLC Agreement, arguably judicial dissolution under § 18-802 might not be warranted".  Id. at 88.  However, the Court disagreed that the exit mechanism in the operating agreement was reasonable, because it did not provide a method to relieve petitioner (Haley) of his obligation as a personal guarantor for the LLC's mortgage.  Thus, the Court granted Haley's petition for dissolution.

Conclusion

Silver Leaf and Haley demonstrate that the Court will consider the following factors in determining whether to grant a petition for dissolution of a Delaware LLC: (i) whether there is deadlock, (ii) whether the operating agreement provides for a mechanism to break the deadlock, (iii) whether the operating agreement provides for a reasonable exit mechanism for the members, and (iv) whether the purpose for which the company was formed could not be carried out.  These decisions should be considered by any party seeking to involuntarily dissolve a Delaware LLC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.