This week I’m departing from my usual, case-focused, long-form post due to time constraints of an impending trial. Instead, I’m putting a well-deserved spotlight on two recently published articles of special interest to business divorce practitioners.
The first concerns one of my favorite topics, on which I’ve written several posts (here, here, here, and here), about whether the courts of one state have subject matter jurisdiction over involuntary dissolution petitions for a business entity formed in another state. The article, entitled Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out?, is co-authored by Peter B. Ladig and Kyle Evans Gay and is published in the Fall 2015 issue of The Business Lawyer (available here).
Ladig and his firm, Morris James LLP, represented one of the members of a Philadelphia-based newspaper publishing company organized as a Delaware LLC in a recent, high-profile dissolution case that initially played out as a game of jurisdictional ping-pong between the Pennsylvania and Delaware courts. Ultimately the Pennsylvania court sided with Ladig’s client and ruled against its own jurisdiction, allowing the case to proceed unobstructed in the Delaware Court of Chancery. It therefore comes as no surprise that Ladig’s thoroughly researched, scholarly article strongly supports the argument against subject matter jurisdiction to dissolve foreign business entities.
From the article’s synopsis:
In early 2014, the then-managing members of the limited liability company (“LLC”) that owned The Philadelphia Inquirer, the Philadelphia Daily News, and philly.com filed nearly simultaneous petitions for judicial dissolution of the LLC in the Court of Common Pleas in Philadelphia and the Delaware Court of Chancery. The dual petitions created the anomaly that everyone agreed on dissolution, but no one could agree where it should take place. Both courts were asked to address a unique question: could a Pennsylvania court judicially dissolve a Delaware LLC? According to existing precedent, the answer was not so clear. This article proposes that the answer should be clear: a court cannot judicially dissolve an entity formed under the laws of another jurisdiction because dissolution is different than other judicial remedies. This approach gives full faith and credit to the legislative acts of the state of formation, but also permits the forum state to protect its own citizens by granting the remedies it feels necessary, short of dissolution.
The second recommended article is entitled The Increasing Role of Equity in Delaware LLC Litigation authored by another pair of Morris James lawyers, Jason C. Jowers and Meghan A. Adams, and published in the ABA’s October 2015 online edition of Business Law Today (available here). The article’s thesis is that the Delaware Court of Chancery, known as the epicenter of contractarianism when it comes to the rights and obligations of members of LLCs and other unincorporated business entities, in some recent cases has shown a willingness to exercise its traditional powers of equity to fill in the “gaps” left unaddressed in the parties’ agreements.
A large part of the article is devoted to a discussion of Vice Chancellor Laster’s opinion earlier this year in the Carlisle case, which I wrote about here, a first-impression ruling in which the court granted “equitable dissolution” of a Delaware LLC upon application of a petitioner which, as the non-member assignee of an original LLC member, lacked standing to seek statutory dissolution.
From the article’s conclusion:
Although one could read Carlisle as a rejection of the LLC Act’s policy to give maximum effect to the freedom to contract, the authors of this article respectfully suggest that would be the wrong takeaway. Cases like Carlisle and Feeley make careful drafting in LLC agreements so as to eliminate gaps more, not less, important. In the case of default fiduciary duties, equity only has a role to play if drafters fail to address by contract the duties that shall govern the managers or managing members. Similarly, in Carlisle, the court chose to exercise its inherent equitable powers to dissolve the entity largely because there was no exit mechanism for WSU Sub. Although there can be little doubt that equity has played an increasing role in LLC litigation, consistently and predictably, the Court of Chancery exercises its equitable powers in cases where the LLC agreements were, for practical purposes, incomplete. Where parties expressly waive fiduciary duties or provide for a true exit mechanism, the court is far less likely to use equity to interfere with the parties’ bargain. Although silence on certain issues may make it easier to get to “yes” at the negotiation table at the time of an entity’s formation, parties risk the application of traditional equitable fiduciary duties and equitable judicial dissolution when they fail to address fiduciary duties and exit mechanisms in the LLC agreement.
I hope you’ll agree with me that both articles are well worth the read.