The tiny state of Delaware plays an enormous role in this country’s corporate life. Delaware has long been the overwhelmingly preferred state of incorporation for publicly owned companies, and its cutting-edge (many would also say pro-management) enabling acts for closely held business entities have made it an exporter to the other 49 states of countless privately owned corporations, limited partnerships, and limited liability companies that have no connection to Delaware other than their state of formation.

The Delaware judicial system serves an integral role in maintaining the state’s corporate hegemony. The Delaware Court of Chancery is widely viewed as the country’s preeminent business-law trial court by virtue of its broad jurisdiction over Delaware business entities both public and private, and thanks to a judicial selection process that promotes the best and brightest candidates for the court’s judgeships including one Chancellor and four Vice-Chancellors whose typically thorough and scholarly written opinions are closely followed by lawyers and judges throughout the country.

Business divorce practice nationwide is no less susceptible to the influence of the Delaware legislative and judicial juggernaut. In New York, as in other states that are home to many Delaware-formed business entities, the internal affairs doctrine mandates application of Delaware law to disputes among entity co-owners, and jurisdictional constraints require owners seeking the ultimate remedy of judicial dissolution to do so in the Delaware Chancery Court. The Chancery Court’s interpretation of Delaware business entity statutes governing internal relations among co-owners of closely held business entities also has had significant influence over the interpretation of counterpart statutes in other states by their judiciaries. (A prominent example of this is the Second Department’s 2010 decision in the 1545 Ocean Avenue case which drew heavily upon Delaware Chancery Court precedent in setting the standard for judicial dissolution of LLCs under Section 702 of New York’s LLC Law.)

HeymanLadigAll of which is why I’m excited to invite readers to listen to my most recent podcast episode on the Business Divorce Roundtable entitled “Business Divorce, Delaware Style” featuring my interview of two leading Delaware litigators — Kurt Heyman (photo left) and Pete Ladig (photo right) — talking about what it’s like to litigate business divorce cases in the Chancery Court and current developments in Delaware law affecting such cases including important decisions I’ve written about on this blog in the TransPerfect, Carlisle, and Meyer cases.

Click on the link at the bottom of this post to hear the interview.

Kurt Heyman is a founding partner of Proctor Heyman Enerio LLP in Wilmington, Delaware, where he focuses his practice on corporate governance, partnership and limited liability company disputes in the Delaware Court of Chancery. Kurt lectures and writes extensively on business divorce and other corporate governance topics, he’s Co-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, and he leads the Business Divorce and Private Company Disputes group on LinkedIn.

Pete Ladig is Vice Chair of the Corporate and Commercial Litigation Group at Morris James also in Wilmington. Pete concentrates his practice in the areas of corporate governance and commercial litigation, stockholder litigation, fiduciary duties, partnership and limited liability company disputes, and class action and derivative litigation. He’s also active in the ABA Business Divorce Subcommittee and has published articles on business divorce topics including a must-read post on his firm’s blog called What Is Business Divorce? Pete also co-hosts a podcast called CorpCast discussing corporate and commercial law in Delaware.

If you’re interested in business divorce, you’ll certainly enjoy listening to my interview of Kurt and Pete, both of whom speak on the subject with great authority, insight, and passion.

Top 10aI’m pleased to present my eighth annual list of the past year’s ten most significant business divorce cases. In previous years my lists rarely included cases outside New York, but this year’s batch includes three important decisions by the Delaware Court of Chancery. Also, reflecting the growing predominance of limited liability companies over close corporations, this year’s selections include seven LLC cases and only three involving corporations. All ten were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

  1. Chiu v Chiu, 125 AD3d 824 [2d Dept 2015], in which the appellate court affirmed without comment a 0% discount for lack of marketability in fixing the fair value of a membership interest in a single asset realty company pursuant to LLC Law § 509, but disagreed with the lower court’s assignment of a 10% interest to the withdrawn member — rather than 25% as reflected in the LLC’s initial tax returns — based on additional capital contributions made by the other member that, according to the appellate court, should have been characterized as loans.
  2. In re Carlisle Etcetera LLC, 2015 WL 1947027 [Del. Ch. Apr. 30, 2015], in which the Delaware Chancery Court held that the assignee of an LLC membership interest, who as a non-member and non-manager lacked standing to seek involuntary dissolution under Section 18-802 of the Delaware LLC Act, nonetheless had standing to seek equitable dissolution under the Chancery Court’s common-law authority as a court of equity.
  3. Barone v Sowers, 128 AD3d 484 [1st Dept 2015], an LLC dissolution case in which the appellate court found inadequate at the pleading stage a non-controlling member’s allegations of “oppression” involving a functioning, financially viable realty-owning LLC, and also dismissed the petitioner’s derivative claims for failure to plead facts showing demand futility.
  4. Meyer Natural Foods LLC v Duff, 2015 WL 3746283 [Del. Ch. June 4, 2015], another novel ruling by Chancery Court where, in granting dissolution of an LLC based on the termination of a supply agreement between its two members, the court looked beyond the LLC’s stated purpose in its operating agreement and instead adopted the petitioner’s “contextual interpretation” of the purpose clause.
  5. Sansum v Fioratti, 128 AD3d 420 [1st Dept 2015], a highly unusual case involving a 6% shareholder’s claim for common-law dissolution of close corporation that operated an art gallery, in which the appellate court ordered the claim’s dismissal without a hearing based on the petitioner’s “unclean hands” stemming from his guilty plea to criminal charges of embezzlement from the company, and invoked the in pari delicto doctrine in rejecting the plaintiff’s argument that the defendants used unlawful means to obtain the money he took.
  6. Goldstein v Pikus, 2015 NY Slip Op 31455(U) [Sup Ct NY County July 20, 2015], in which the court granted summary judgment dismissing an LLC dissolution petition involving a realty-holding company where the petitioner’s allegations of deadlock and misconduct by the managing member failed to establish that the LLC was financially infeasible or was unable to function in accordance with its purpose as stated in its operating agreement.
  7. Shapiro v Ettenson, 2015 NY Slip Op 31670(U) [Sup Ct NY County Aug. 16, 2015], a case of apparent first impression in which the court held enforceable under LLC Law § 402(c)(3) an operating agreement executed by the majority members over a year after the LLC’s formation, which included provisions for additional capital contributions and adjustment of member percentage interests for failure to make a requested contribution.
  8. Matter of Digeser v Flach, 49 Misc 3d 1213(A) [Sup Ct Albany County 2015]  , which I referred to as a “classic case” of minority shareholder oppression, where the court’s post-trial decision found that the petitioner established grounds for dissolution under BCL § 1104-a after the majority shareholder terminated his employment, cut off all salary and benefits, and removed him from the board of directors.
  9. Matter of Activity Kuafu Hudson Yards LLC, Index No. 650599/15 [Sup Ct NY County Apr. 14, 2015], in which the court dismissed for lack of subject matter jurisdiction a petition to dissolve an allegedly deadlocked Delaware LLC, notwithstanding a provision in its operating agreement waiving the members’ right to bring an action relating to the agreement in any court outside New York County, New York.
  10. Shawe v Elting, C.A. No. 9661-CB [Del. Ch. Aug. 13, 2015], a case in which the two 50/50 owners of an immensely successful business found themselves “locked in corporate hell” due to their personal animosity, leading the Delaware Chancery Court to grant an application under DGCL § 226 to appoint a custodian to sell the company either to one of the two owners or to an outside buyer.

articlesThis 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, herehere, 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. Continue Reading Recent Articles Highlight Dissolution of Foreign Entities and Delaware LLC Litigation

Del Ct Chancery 2Viewing the arc of Delaware Chancery Court jurisprudence over the last two decades implementing that state’s Limited Liability Company Act, and witnessing the Delaware legislature’s frequent amendments to the statute in reaction to judicial developments, you can’t help but detect a pattern of maintaining the unique attributes of the Delaware LLC, as compared to other forms of business entity, by:

  • rigorously promoting freedom of contract (in the form of the LLC agreement) and its corollary, “you made your bed now lie in it”;
  • deciding internal governance disputes within the bounds of the interplay of the Delaware LLC Act’s default rules and the LLC agreement; and
  • strongly disfavoring judicial intervention based on open-ended notions of fairness (the main exception being when managers take on fiduciary duties by agreement or by default under the statute).

Stated simply, in Delaware certainty trumps indeterminacy.

Well, not always, as seen in a first-impression ruling last week by Vice Chancellor J. Travis Laster in In re Carlisle Etcetera LLC, C.A. No. 10280-VCL (read here), in which the court held that the assignee of an LLC membership interest, who as a non-member and non-manager lacked standing to seek involuntary dissolution under Section 18-802 of the Delaware LLC Act, nonetheless had standing to seek equitable dissolution under the Chancery Court’s common-law authority as a court of equity.  Continue Reading Delaware Chancery Court Endorses Equitable Dissolution of LLC