Section 18-802 of Delaware’s Limited Liability Act (“LLC Act”) provides a statutory basis for the Court of Chancery to dissolve a Delaware LLC.  The statute, which confers standing upon an LLC member of manager, states that 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.”  6 Del. C. § 18-802.

The question becomes, may the Court of Chancery dissolve a Delaware LLC under equitable grounds, separate and apart from the statutory basis under Section 18-802?  And if so, does a petitioner who is not a member or manager of an LLC have standing to petition the Court to equitably dissolve the LLC?

Background

This precise issue was addressed in the recent decision of SolarReserve CSP Holdings LLC v. Tonopah Solar Energy LLC, C.A. No. 2019-0791-JRS (Del. Ch., Mar. 18, 2020).  In SolarReserve, Vice Chancellor Slights dismissed a petition for the equitable dissolution of Tonopah Solar Energy LLC (“Tonopah”).  The petitioner, SolarReserve CSP Holdings LLC (“SolarReserve”), was not a member or manager of Tonopah, but held an indirect equity interest in Tonopah through several intermediary entities.

According to the opinion, Tonopah is a federally funded, nonoperational $1 billion solar energy project in Nevada.  The entity was funded by a $700 million loan from the U.S. Department of Energy (“DOE”) after Tonopah sought out additional funding sources to cover expenses.  SolarReserve was initially the sole owner of Tonopah, having invested $90 million into the company.   After obtaining funding from the DOE, Tonopah also entered into a into a co-venture relationship with Cobra Thermosolar Plants, Inc. (“Cobra”), a construction firm.

The Complaint alleged that Cobra botched the construction of the power plant, which caused the DOE to declare events of default that triggered rights to alter Tonopah’s governance structure, thereby removing SolarReserve from control over Tonopah.  As alleged in the Complaint, “the DOE’s actions, if left unchecked, will result in a forfeiture of SolarReserve’s property rights in a $1 billion project related to a solar power plant which SolarReserve started in 2008 — without an opportunity to contest that forfeiture.”  However, the Court noted that neither the DOE nor Cobra are parties to the action.

Analysis

In granting Tonopah’s motion to dismiss, Vice Chancellor Slights concluded that SolarReserve had “not pled facts that would justify, much less allow, dissolution as a matter of equity.”  The opinion states:

As noted, SolarReserve does not seek Tonopah’s statutory dissolution because it is neither member nor manager of Tonopah.  Instead, SolarReserve asks the Court to dissolve Tonopah as a matter of equity. This is a far less-traveled path to achieve the dissolution of a Delaware LLC. To be sure, this court views any form of judicial dissolution as a limited remedy that [should be] grant[ed] sparingly. Where, as here, a petitioner seeks equitable dissolution outside of the grounds enumerated in the Act, such as where a non-member/non-manager seeks dissolution, that petitioner must explain in a convincing manner why this court should invoke equitable principles to override the plain language of the Act and the relevant LLC agreement.

Slip op., at 13 (internal quotations and footnotes omitted).

Vice Chancellor Slights held that the Complaint failed to allege facts supporting the “extreme remedy” of equitable dissolution of a Delaware LLC.  In so ruling, the Court distinguished In re Carlisle Etcetera LLC, 114 A.3d 592, 597 (Del. Ch. 2015), which SolarReserve cited to in favor of equitable dissolution.  The Court noted that while the equitable dissolution of a Delaware LLC was granted in Carlisle, the facts warranted such a remedy because, among other things, the board was deadlocked and unable to remove its CEO that was hand-picked by a 50% member, who ruled the roost “free of any oversight.”  Carlisle, 114 A.3d at 594.  In Carlisle, Vice Chancellor Laster held that the petitioner had stated a claim for equitable dissolution based on the court’s “retain[ed] . . . residual authority” that prevents a Delaware LLC from being “wholly exempt” from judicial oversight. Slip op. at 16 (citing Carlisle, 114 A.3d at 606).

In determining whether to grant Tonopah’s motion to dismiss, Vice Chancellor Slights framed the question as follows: “has SolarReserve pled a set of reasonably conceivable facts ‘where it appears manifest’ that equity must intervene?” Slip op. at 17.  The Court noted that SolarReserve made a series of “calculated choices to reshape Tonopah’s complicated ownership structure in order to secure additional funding[]”, such that “SolarReserve’s ‘real relationship’ to Tonopah is that of a remote, indirect investor, not a member.” Id.  By contrast, in Carlisle, although the petitioning party had transferred its membership rights in the LLC to a wholly owned subsidiary (and thus lacked standing to seek statutory dissolution), equity “prompted the court to give effect to the parties’ ‘real relationship’ as a ‘joint venture in which they are equal participants’ with neither member intending to be a ‘passive investor.’” Id. (citing Carlisle, 114 A.3d at 606).  This was further supported by the fact that just months before the Carlisle action was filed, the parties had been operating under a draft operating agreement in which the wholly-owned subsidiary had actually been named as a member.

The Court also rejected SolarReserve’s “last-ditch” argument that because the operating agreement provided SolarReserve with certain rights similar to those of an LLC member, this reflected a right to confer member rights upon SolarReserve for all matters.   The Court noted that SolarReserve was expressly not named a member under the LLC agreement.  “Under these circumstances, SolarReserve cannot swoop in on the wings of equity as if it were a Tonopah member to impose its preferences for the Company’s future when it bargained away that status.” Slip op. at 20.

Key Takeaway

SolarReserve reconfirms the high climb that exists for the Court to equitably dissolve a Delaware limited liability company.  Simply asserting wrongdoing against other members or managers (without even naming them as parties), while not effectively asserting deadlock, will make the climb even steeper.  Litigants should carefully consider this decision along with the Carlisle opinion in assessing the viability of a claim for equitable dissolution of a Delaware LLC.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.