Dissolution

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The Delaware Court of Chancery recently approved a plan to sell TransPerfect Global, Inc. (“TransPerfect” or the “Company”) to co-owner Philip Shawe. In the Court’s most recent opinion issued earlier on February 15, 2018, In re TransPerfect Global, Inc., C.A. No. 9700-CB (Del. Ch. Feb. 15, 2018), Chancellor Bouchard  approved a sale agreement that permitted Shawe to acquire shares of the company owned by Elting.  Specifically, the Court accepted the recommendation of the court-appointed Custodian to approve a transaction in which one of the co-founders of TransPerfect Global, Inc. (Philip Shawe) will acquire the shares held by the other co-founder (Elizabeth Elting) to resolve the pending litigation.

From March through November 2017, the Custodian conducted an extensive sales process to follow the Court’s mandate “to sell the Company with a view toward maintaining the business as a going concern and maximizing value for the stockholders.”  After three formal rounds of bidding and an informal fourth round to elicit “final” bids, two leading bidders emerged: Shawe and H.I.G. Middle Market, LLC (“H.I.G.”), the owner of TransPerfect’s leading competitor. The Custodian believed that Shawe would offer greater consideration
than H.I.G. with fewer closing conditions, while retaining virtually all of the Company’s employees, and thus negotiated with Shawe to finalize a transaction.

Co-owner Elizabeth Elting objected to the Custodian’s recommendation that the court approve the Sale Agreement, asking the Court to reject the Sale Agreement and to direct the Custodian to negotiate a transaction with H.I.G.  The Court rejected each of Elting’s objections, while providing guidance on the discretion of a Court-appointed custodian in selling a deadlocked corporation.

By way of background, in November 2017, Chancellor Bouchard approved a modified auction of the Company, over the objections of Shawe.  For a link to a prior post discussing the November 2017 opinion, click here.   Prior to that, in September 2017, the Court denied an application for interlocutory appeal filed by Philip Shawe’s mother, who is a 1% stockholder of the Company.  The appeal request was filed in response to the Court’s denial of Ms. Shawe’s request to hold an election under Section 211 of the DGCL.  Click here for a post discussing the September 2017 opinion.

UPDATE: On May 3, 2018, the Delaware Supreme Court affirmed the February 15, 2018 opinion of Chancellor Bouchard approving the sale of TransPerfect, summarized above.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of In re: GR Burgr, LLC; GR US Licensing, LP v. Rowen Seibel, C.A. No. 12825-VCS (Del. Ch. Aug. 25, 2017), Vice Chancellor Slights entered an order judicially dissolving a Delaware limited liability company under Section 18-802 of the Delaware LLC Act. This decision provides an excellent roadmap for parties or practitioners seeking the judicial dissolution of a Delaware LLC.

Background

Here, petitioner GR US Licensing, LP (an entity affiliated with Gordon Ramsay) (“GRUS”), partnered with Respondent, Rowen Seibel, to form GR BURGR, LLC (“GRB” or the “Company”) for the purpose of developing and operating first-class burger-themed restaurants.  The only revenue-generating business GRB has launched since its formation was with an affiliate of Caesars Entertainment Corporation (“Caesars”), where GRB licensed and sublicensed certain trademarks and other intellectual property for Caesars’s use in a burger-themed restaurant in the Planet Hollywood Resort & Casino in Las Vegas, Nevada (“Planet Hollywood”).

In 2016, Seibel was convicted of a felony tax-related offense, after which Caesars terminated the parties’ agreement, finding that Seibel was an “unsuitable person” as defined in the parties agreement with Caesars.  According to Caesars, any further business relationship with Seibel, or any business with which he is affiliated, would place Caesars in violation of Nevada gaming regulations.  In part based on this development, GRUS (and Ramsay) sought to dissolve GRB and to disassociate from Respondent Seibel.

Analysis

Petitioner moved for judgment on the pleadings, stating that the facts admitted by Seibel demonstrate as a matter of law that dissolution is warranted under Section 18-802.  Section 18-802 provides: “On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.”  The Court stated that “not reasonably practicable” standard does not require a petitioner to “show that the purpose of the limited liability company has been ‘completely frustrated.’”  Rather, “[t]he standard is whether it is reasonably practicable for [the company] to continue to operate its business in conformity with its LLC Agreement.”

The Court found that dissolution was warranted, and granted Petitioner’s motion for judgment on the pleadings.  The Court stated that given the admitted facts,  “the notion that the deadlock might somehow be broken in the future is simply not reasonably conceivable. Ramsay, and his entity GRUS, no longer want to be associated with Seibel due to his felony tax-related conviction and the reputational damage that will flow from their continued connection with him. This circumstance will not change as future events unfold.”  The Court went on to state that each party entered the venture under the presumption that the other was an honorable actor.  “This presumption was shattered when Seibel was convicted of a felony, especially one involving dishonesty.”

Further, the Court reiterated the significance that deadlock played.  Here, GRUS and Seibel are both 50% owners of GRB, each was entitled to appoint one manager, all decisions of the managers must be unanimous, and there was no method to break deadlock.  These factors were each considered by the Court in determining whether to dissolve the LLC.

Key Takeaway

While the involuntary dissolution of a Delaware limited liability company is a “discretionary remedy” that is granted “sparingly”, operating agreements that provide for 50/50 control over an LLC, with no means to break deadlock, will increase the chances that a Court will consider dissolution.  For example, in a 50/50 LLC, the Court may look to the factors of Section 273 of the DGCL by analogy to determine whether dissolution is warranted.  See prior post discussing the application of DGCL 273 to 50/50 LLCs.  To safeguard against this possibility, therefore, parties to an operating agreement should consider ways to avoid such deadlock, in order to minimize the possibility of involuntary dissolution by the Court of Chancery.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Clients can pick their own attorneys but they cannot pick their own facts. A recent case decided by Master Ayvazian highlights the difficulties that unfortunate facts can present.

Creditors have eight months to file a claim against an estate (see 12 Del.C. §2102(a)). After a claim is presented, the executor (or personal administrator) can pay the claim or can deny the claim. Other than failure to timely file the claim (see 12 Del.C. §2102(a)), there is no statutory justification for denial of claim. In fact, Delaware has historically held that fiduciaries owe a fiduciary duty to creditors. See In re Estate of Bennie P. Farren, Del. Ch., C.A. No. 9385-MA (June 18, 2015).

Last will and testament
Copyright: stuartburf / 123RF Stock Photo

Delaware Acceptance Corporation, CACV of Colorado, LLC and 202 Investments, Inc. v. Estate of Frank C. Metzner, Sr., Lona C. Metzner, Executrix and Frank C. Metzner, Jr., the Metzner Family, LLC, C.A. No. 8861-MA involved an executor who denied a claim in the amount of $41,002.59 which had been filed against the estate by a credit card company. After four years of litigation, the Court of Chancery, Master Kim Ayvazian, found that the case hinged on the authenticity of a document, which in turn depended upon the credibility of several witnesses. The Court found that the backdating of documents and the offering of false testimony at trial rendered the Executrix unfit to serve as fiduciary and ordered her removal.

Frank C. Metzner, Sr. (“Frank , Sr.”) and his wife, Lona C. Metzner (“Lona”), deeded their house in Lewes into the Metzner Family Limited Liability Company (the “LLC”) in 2002. Frank, Sr. and Lona each held originally a fifty percent interest in the LLC but subsequently they gave two percent to their son, Frank, Jr.

In 2003, Frank, Sr. and Lona stopped paying their bills, including their credit cards, when the outstanding balance totaled approximately $55,000. Plaintiffs Delaware Acceptance Corporation CACV of Colorado, LLC and 202 Investments, Inc. (“Creditor”) sought a Charging Order based upon the Court of Common Pleas judgments that had been entered against Frank, Sr. and Lona. The Charging Order was signed on December 6, 2010 and served upon the LLC to attach to any distributions from the LLC to either Frank, Sr. or Lona. Frank, Sr. and Lona’s personal residence which was the asset of the LLC clearly did not have any income spitting out so the Charging Order laid dormant.

Subsequently Frank, Sr. died on October 26, 2012 and his Will, which was filed on December 5, 2012, named Nona as executor. The sole asset in the Estate was Frank, Sr.’s 49% interest in the LLC which was left to his son, Frank, Jr. Creditor filed its claim against the Estate on April 15, 2013. The Estate’s attorney denied the claim by letter dated June 3, 2013 on the basis that: (1) the Estate was devoid of assets other than the 49% LLC interest; (2) it was understood that the Charging Order was not dissolved by Frank, Sr.’s death; (3) Frank, Sr.’s 49% interest transferred under the Will to Frank, Jr. remained subject to the Charging Order. This was unacceptable to the Creditor.

Under the LLC Agreement (as was common in those days), the death of a member was considered a withdrawal, resulting in the dissolution of the LLC unless the surviving members elected to continue the LLC within 90 days of the death of the member. If the LLC were dissolved, 49% of the personal residence would have been distributed out to the Estate of Frank, Sr. thereby, the Executrix (faced with the Charging Order) as a fiduciary for the creditor, could have been directed to sell the house to satisfy the claim.

Within the required three month window (under 12 Del.C. 2102(b)) the Creditor filed a complaint alleging its belief that the LLC had dissolved after the death of Frank, Sr. due to the failure of the remaining members, Lona and Frank, Jr., to have consented in writing to continue the LLC within the 90 days after Frank, Sr.’s death.

In response, the Executor alleged that the remaining members (Lona and Frank, Jr.) had effectively elected to continue the LLC after Frank, Sr.’s death and proffered first a signed writing dated November 30, 2012 (the “Election”).

The Court found the Election suspect and in an effort to discern the actual date of the Election, directed the Creditor’s attorney to request the metadata relevant to the Election from the computer of the attorney who had drafted the document and/or such attorney’s former firm’s network server and to produce the data to the Court within 60 days. If the metadata was not produced, the Court would draw an adverse inference that the Election had been created after the 90-day period following Frank, Sr’s death. No metadata was ever delivered to the Court.

The attorney testified that he believed that the Election had been prepared in his office although the Election did not have certain identifiable marks (e.g. file number) that would evidence such preparation, nor was the Election-signing ceremony on the attorney’s calendar.

Undeterred, at trial Lona introduced a second document that had not previously been produced during the litigation (the “November 10th letter”). The November 10th letter (admittedly written by Lona) would have served as a sufficient writing to continue the LLC had the Court believed its provenance or if the metadata associated with the November 10th letter been provided. According to Lona’s testimony at trial, however, the computer that had generated the November 10th letter had “gone bad” a few years ago and had been disposed of.

Unfortunately for her, Lona was not a credible witness.

In concluding that Lona should be removed as Executor for cause, the Court held that a person who backdates documents and offers false testimony at trial should not be a fiduciary of an estate. The Court ordered the appointment of a new personal administrator with an order to: (1) dissolve the LLC; (2) liquidate the assets in the LLC; and (3) make disbursements to pay off the Creditor as required in the Changing Order.

Key takeaways:

First, review LLC Agreements to discern whether mandatory election is necessary and advisable and amend the LLC Agreement if appropriate. Second, only go into trial with a firm belief in the honesty of your client’s version of the facts. Otherwise, don’t let your client pick you as their attorney.

Beth B. Miller is counsel with the law firm of Fox Rothschild LLP, resident in its Wilmington office. She practices business, tax and trusts and estates law. You can reach Beth at (302) 622-4219 or at bbmiller@foxrothschild.com.

The recent decision of Trusa v. Nepo, C.A. No. 12071-VCMR (Del. Ch. April 13, 2017), stands for the proposition that a creditor lacks standing to assert a derivative claim against a limited liability company.  In Trusa, the plaintiff creditor Steven B. Trusa brought a derivative action for breach of fiduciary duty and dissolution of Xion Management, LLC (“Xion” or “LLC”).  The creditor brought such claims, among other reasons, as a result of his assertion that he lent money to the LLC under false pretenses.  One of the managing members moves to dismiss the action for lack of standing, duplication, and failure to state a claim.

Vice Chancellor Montgomery-Reeves granted the motion to dismiss in its entirety.  The Court held that under the plain language of the Delaware Limited Liability Act, only members and assignees can assert derivative claims on behalf of a limited liability company.  The Court rejected Trusa’s argument that the power of attorney provision in the loan agreement granted creditor a contractual right to assert derivative claims, as the clause only permitted Trusa to pursue remedies as provided in the Agreement.

The Court also rejected Trusa’s demands for dissolution and fraud.  Only a member or manager may seek dissolution of a limited liability company under the Delaware LLC Act’s dissolution statute, 6 Del. C. § 18-802.  Moreover, the Court found that the extreme remedy of “equitable dissolution” did not apply.  Finally, the Court rejected the creditor’s attempts to raise fraud in a breach of contract claim.

Notably, the Court rejected Trusa’s argument that because the LLC’s Certification of Formation was automatically cancelled under Section 18-203 of the LLC Act, he should be permitted to seek appointment of a receiver under Section 18-805 of the LLC Act.  But as Vice Chancellor Montgomery-Reeves held:  “a creditor may only seek the appointment of a trustee or receiver [under Section 18-805] when a certificate of cancellation is filed after the dissolution and winding up of the company, not where the certificate of formation has been canceled by operation of law for want of a registered agent.” (emphasis in original).  The Court declined Trusa’s invitation to “read any cancellation method under Section 18-203(a) as triggering the rights granted to creditors in Section 18-805….”

Key Takeaway: Creditors will be denied standing to assert derivative claims to recover damages.  The preferred course is to prepare for such contingencies in the loan documents.  In addition, a creditor must wait until a certificate of cancellation is filed in order to seek appointment of a receiver under Section 18-805 of the LLC Act.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of Kleinberg v. Aharon, C.A. No. 12719-VCL (Del. Ch. Feb. 3, 2017), the Court of Chancery appointed a custodian over a Delaware corporation under Section 226 of the Delaware General Corporation Law (“DGCL”) to break deadlock.  A voting agreement allowed for 6 board seats, 3 of which were controlled by Defendant Refeal Aharon, the founder and CEO of Applied Cleantech, Inc. (“Applied Cleantech” or the “Company”).  Aharon had traditionally appointed only 2 directors, but fearing that a 3-2 majority had formed against him, he appointed a 3rd director, which caused a 3-3 split on various issues at a meeting.

Under Section 226(a)(2), the court may appoint a custodian when:

The business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division[.]

Notably, the custodian was appointed with limited powers.  In this regard, the Court cited to case law stating that the appointment of a custodian is not mandatory.  Accordingly, the Court appointed a custodian “with the power to vote as a seventh director and the authority to take additional steps to resolve the deadlock.”

For a prior post on a demand for the appointment of a custodian of a Delaware corporation, click here.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of In the Matter of Dissolution of Artic Ease LLC, C.A. No. 8932-VCMR (Del. Ch. Dec. 9, 2016), the Court of Chancery analyzed whether an LLC member and certain affiliated entities were subject to the jurisdiction of Delaware under 6 Del. C. § 18-109, and ultimately dismissed third-party claims for lack of personal jurisdiction.

Section 18-109 of the Delaware LLC Act allows Delaware courts to exercise personal jurisdiction over parties who manage Delaware limited liability companies in actions “involving or relating to the business” of the company. Section 18-109(a) describes two types of “manager[s]” for personal jurisdiction purposes: (1) managers as defined in the operative limited liability company agreement and (2) parties who “participate[] materially in the management” of a Delaware limited liability company.

The Court also cited to an opinion of the U.S. District Court for the District of Delaware, which held that alleged managers in charge of financial and commercial functions for a limited liability company who act subject to the board’s authority do not “participate[] materially in the management” absent a “control or decision-making role” in the company. Wakely Ltd. v. Ensotran, LLC, 2014 WL 1116968, at *5 (D. Del. Mar. 18, 2014).

The Court found that the third-party defendants were not managers and thus not subject to the Court’s jurisdiction under Section 18-109.  Specifically, the Court rejected third-party plaintiffs’ argument that third-party defendant William Cohen was a manager of Summetria, LLC under Section 18-109(a)(i) because he was an original member of the Summetria board of directors, and as such, he possessed voting power.  The Court disagreed, finding that Cohen is not a manager of Summetria under Section 18-109(a)(i) because the Summetria LLC Agreement makes clear that another individual, Carol Forden is the sole manager of Summetria.  The Court also found that Cohen did not materially participate in the management of the LLC in that he had no control or decision-making role.

In sum, merely acting as an officer, without more, will not suffice when that person is subject to the control of others.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Often times, shareholders may seek to dissolve a Delaware corporation and appoint a receiver for a variety of reasons, including the fact that the stockholders and/or management simply cannot “get along.”

Unfortunately for such stockholders, if the corporation is solvent (other than “joint venture” entities which are governed by Section 273), the Court will exercise the power to dissolve the same with “great restraint” and only upon a “strong showing.”  Carlson v. Hallinan, 925 A.2d 506, 543 (Del. Ch. 2006).

In fact, dissolution and the appointment of a receiver will be exercised by the Court only upon a showing of:

[G]ross mismanagement, positive misconduct by corporate officers, breach of trust, or extreme circumstances showing imminent damager of great loss to the corporation which, otherwise, cannot be prevented.  Id.

However, “mere dissension among corporation stockholders seldom, if ever, justifies the appointment of a receiver for a solvent corporation….” Id.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

If a petitioner is able to satisfy the three requirements set forth in Section 273 of the DGCL—namely (i) two 50/50 stockholders, (ii) engaged in a joint venture, and (iii) are unable to agree as to whether to discontinue the company—will the Court automatically grant dissolution of the entity?

The statute provides that the Court “may” dissolve the corporation and wind up its affairs when the requirements of the statute are met.  When a petitioner has satisfied each of these elements, the Court’s discretion to deny the petition is “sparingly exercised.”  In re McKinney-Ringham Corp., 1998 Del. Ch. LEXIS 34, at *16 (Del. Ch. Feb. 25, 1998).

Of note, the Court has interpreted the permissive nature of the statute to allow it to order equitable relief under Section 273 other than dissolution.  For example, in Fulk v. Washington Service Assoc., Inc., C.A. No. 17747-VCJ (Del. Ch. June 21, 2002), the Court approved a custodian’s plan to sell the joint venture at issue as a going concern to either of the 50/50 stockholders instead of dissolving the corporation, stating “the statute permits the Court flexibility in deciding how the joint venture should be discontinued….”

Therefore, a litigant to a Section 273 proceeding may be able to seek alternative relief from the Court other than solely the dissolution of the joint venture under the statute.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Under Section 273 of the DGCL, the third requirement under the statute is the inability of the two stockholders to agree upon the desirability of discontinuing the joint venture and disposing of its assets.

The meaning of this phrase was addressed in the case of In re Venture Advisers, Inc., 1988 Del. Ch. LEXIS 151 (Del. Ch. Dec. 1, 1988).  There, the objecting stockholder argued that this requirement had not been met because the stockholders had never discussed discontinuing the business, and the objecting stockholder had never refused the corporation voluntarily.

In rejecting the objecting stockholder’s argument, the Court found that the critical inquiry is whether there exists “a genuine inability to agree”, and “any competent evidence” may be proffered to prove such disagreement.  Moreover, the Court held that direct communications between the stockholders was not the exclusive means of establishing the inability to agree factor.  In Venture Advisers, the Court found that petitioner had established a “genuine inability to agree” under the “totality of the circumstances.”

Accordingly, parties may be able to establish the third element of the Section 273 statute without the necessity for direct personal communications between the stockholders conferring on the issue of whether to discontinue the joint venture prior to filing the petition.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Since the 1959 Carmer decision discussed in the prior post, several other noteworthy Delaware opinions have explained what exactly a “joint venture” means for purposes of Section 273 of the DGCL.

Most notably, the Delaware Supreme Court in Warren v. Goldfinger Brothers, Inc., 414 A.2d 507 (Del. 1980) identified factors to be considered by the Court in determining whether a company qualifies as a “joint venture” as follows:

  1. a community of interests in the performance of a common purpose;
  2. joint control or right to control;
  3. a joint proprietary interest in the subject matter;
  4. a right to share in the profits; and
  5. a duty to share in the losses that may be sustained.

The Carmer and Goldfinger Brothers decisions are commonly cited and referred to when determining whether an entity qualifies as a joint venture under Section 273.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.