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Chancery Court Rejects Request to Dissolve LLC

By Francis G. X. Pileggi, Esq.

In Re: Arrow Investment Advisors, LLC, Del. Ch., No. 4091-VCS (April 23, 2009), read opinion here.

This Chancery Court decision dismissed a petition seeking a dissolution of an LLC pursuant to Section 18-802 of the Delaware LLC Act. Although each year brings more case law interpreting this statute, there is still a comparative paucity of decisions interpreting this section of the LLC Act; thus, this ruling is helpful for purposes of determining when the court will grant a judicial dissolution under the applicable statutory standard.

Prerequisites for Seeking Judicial Dissolution of an LLC

Section 18-802 gives the court the discretion to order judicial dissolution of an LLC  when one demonstrates that: "it is not reasonably practicable to carry on the business in conformity with [the]limited liability agreement." This opinion collects and discusses the Delaware decisions that have discussed this statutory dissolution standard (which reasonable people can easily differ about regarding its application.) See footnotes 10,12,13,14,15, 20, 23, 24 and 28.

Anyone who is involved in the analysis of whether a Delaware LLC can be judicially dissolved  upon the request of only one member or manager, needs to read this decision. In essence, the court reasoned, in part,  that although the member seeking dissolution:

...might be disappointed that he has been ousted from the management of the company, disagree with the tack its current managers are taking, and wish to take his capital out of the company, these are not circumstances from which I can reasonably infer that it has become impracticable for Arrow to provide a return for its investors....

Reasoning for Denying Dissolution

In sum, at the risk of oversimplifying the extensive factual and legal analysis that the opinion provides, the request for dissolution was rejected, and the motion to dismiss the petition was granted, because the LLC agreement had a very broad "purpose clause" that  the LLC was still operating within, and it was not enough that the original business plan was not being followed, nor that the minority member was unhappy with the management or direction of the company.

Even with a broad purpose clause, however, in theory the court explained that dissolution is still possible if it can be established that perpetuation of the entity would be "obviously futile and would not result in business success." (See, e.g., case cited in footnote 20)

Procedurally, the court also observed that asserting claims for breach of fiduciary duty as part of  the petition for dissolution in this case did not strengthen the arguments for dissolution. Moreover, the petitioner did not follow the derivative procedures required for the fiduciary claims that were made. Lastly, as a procedural matter, dissolution proceedings are narrow in scope and usually do not include ancillary claims. See footnote 28.

Full post as published by Delaware Corporate and Commercial Litigation Blog on April 23, 2009 (boomark / email).