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.
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.
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.
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 firstname.lastname@example.org.