The Delaware Court of Chancery last month granted a petition to dissolve a deadlocked Delaware limited liability company (LLC). Chancellor William B. Chandler III’s carefully reasoned decision in Fisk Ventures, LLC v. Segal, 2009 WL 73957 (Del. Ch. Jan. 13, 2009), is likely to set the standard for cases of this sort inside and outside Delaware. It is must reading for business divorce practitioners whom increasingly are being called upon to handle breakups of LLCs as they become the predominant form of closely held business entity.
As important as the case is, I’m not going to give it my usual full-blown analysis, for two reasons. First, I’m in the middle of a trial and don’t have the time. Second, excellent treatments already have been published by law professor bloggers Larry Ribstein (here) and Gary Rosin (here). So I’ll just make a few quick observations on the Fisk case:
- Delaware’s statute governing judicial dissolution of LLCs uses language substantially similar to New York’s statute (LLC Law 702), authorizing dissolution “whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.”
- Chancellor Chandler sums up Delaware case law construing the statute as follows: “The text of § 18-802 does not specify what a court must consider in evaluating the “reasonably practicable” standard, but several convincing factual circumstances have pervaded the case law: (1) the members’ vote is deadlocked at the Board level; (2) the operating agreement gives no means of navigating around the deadlock; and (3) due to the financial condition of the company, there is effectively no business to operate.”
- Here’s another important quote from the decision: “If a board deadlock prevents the limited liability company from operating or from furthering its stated business purpose, it is not reasonably practicable for the company to carry on its business.”
- The LLC in Fisk was governed by a 5-member board requiring 75% approval for all management decisions. The board rarely met and, for almost two years, one faction refused to convene meetings. The operating agreement has no mechanism for breaking deadlock, prompting Chancellor Chandler to observe: “The provision requiring a 75% vote for Board action was agreed upon by the parties to specifically prohibit board domination by one party over another. The provision has certainly accomplished its intended purpose. Unfortunately, it has also led to a stalemate, and the LLC Agreement on its face provides no means of remedying the situation.” Note that the same concept holds true for a typical 50-50 LLC whose operating agreement has no tie-breaker mechanism.
- The member resisting dissolution argued that the petitioner should be required to exercise its right under the operating agreement to put its membership for fair value, in lieu of dissolution. Chancellor Chandler refers to the put right as a bargained-for option and refuses to “second guess” the holder’s decision whether or not to exercise its option rights.
- The opinion’s concluding passage nicely summarizes the case. Here it is:
“This case involves a long-lived corporate dispute that resulted in devastating deadlock to Genitrix’s Board and the loss of significant value to all involved. Genitrix’s Board is hopelessly deadlocked, and the LLC Agreement fails to anticipate that risk by prescribing a solution to the Board conflict. Further, Genitrix has no office, no operating revenue, and no prospects of equity or debt infusion. Because Genitrix’s dire financial straits leave the Company with no reasonably practical means to operate its business, I conclude judicial dissolution in accordance with the LLC Agreement is the best and only option for these parties. For the foregoing reasons, I grant the motion seeking judgment in favor of petitioner on the petition for dissolution.”