The Delaware Court of Chancery addressed a petition for judicial dissolution of a Delaware limited liability company (the “Company”). The court began its analysis by noting that judicial dissolution of an LLC is granted sparingly and is only proper when “it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” Both the petitioner and the respondents agreed that the Company was deadlocked and needed to be dissolved. However, the respondents did not want the dissolution of the Company to negatively affect their position in a separate action being litigated in California. To resolve this problem, the Court issued an order that dissolved the Company but mandated that the dissolution not foreclose or affect the respondents’ standing in the separate California Action.
BOTTOM LINE: You can avoid deadlock between the members of an LLC by carefully drafting the operating agreement to account for such a situation. A sound operating agreement will provide the process that must be used to resolve a deadlock. For example, the operating agreement could include a dispute resolution clause, which requires the parties that are deadlocked to submit the issue to a neutral third party for resolution.
NOTE: This is an interesting case in that it involves a Delaware Court ordering a party not to use a specific defense in an out-of-state action as a condition to judicial dissolution. As such, it involves principles of equity under Delaware law as well as principles of choice of law. If appealed, this case should be closely observed to see how the Delaware Supreme Court addresses the interplay between both sources of law.