Under both New York and Delaware law, members of an LLC may petition for judicial dissolution on the grounds that the management is so hopelessly deadlocked that the LLC can no longer function in accordance with its purpose as defined in its governing documents.
In those cases, courts will consider whether the LLC operating agreement contains some other mechanism to break the deadlock. If the operating 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 her interest, it is at least arguable that the LLC can still proceed to function, because there exists an equitable way to break the impasse.
Coequal LLC members might agree in their operating agreement to break a deadlock with a shotgun buy-sell agreement. In the event of a deadlock, the initiating member names a price, and thereby gives the other member the option to either buy the initiating member’s interest or sell his own interest at that price. “I cut, you choose.”
In theory, because a shotgun buy-sell agreement can equitably break an impasse, a member’s electing to initiate the shotgun buy-sell procedure should foreclose a petition for deadlock-based dissolution. In practice, disputes over the implementation of that election might make dissolution appropriate after all. That’s the lesson of Seokoh, Inc. v Lard-PT, LLC, CV 2020-0613-JRS [Del Ch Mar. 30, 2021], in which Vice Chancellor Slights cited the flaws in the parties’ shotgun buy-sell agreement as the basis for his refusal to dismiss a 51% member’s petition for deadlock-based dissolution.