In this prior post, we discussed the “not reasonable practicable to carry on the business” standard for the involuntary dissolution of a Delaware alternative entity, such as LLCs, LPs and GPs. This post will analyze several Delaware cases in which the Court was confronted and denied a petition to dissolve an alternative entity in light of its “broad purpose” clause in the entity’s operating agreement.
Practically speaking, often a stated purpose of an alternative entity is intentionally broad, such as authorizing an entity to engage in “any lawful business purpose” or using similarly expansive language. This language may prove problematic if a member later petitions the Court to involuntarily dissolve the company.
In the case of In re Arrow Investment Advisors, LLC, C.A. No. 4091-VCS, 2009 WL 1101682 (Del. Ch. Apr 23, 2009), the Court dismissed a petition to dissolve the company, Arrow, brought by one of its co-founders. Petitioner sought dissolution because the company failed to fulfill its original business plan. In denying the petition, the Court indicated that the operating agreement, not the business plan, of Arrow must be looked to in order to determine whether it is “no longer reasonably practicable to carry on the business” of the company. The Court also noted the high standard associated with a judicial dissolution, and indicated that it “will not dissolve an LLC merely because the LLC has not experienced a smooth glide to profitability or because events have not turned out exactly as the LLC’s owners originally envisioned”. Id. at *2.
Of note, the Court provided instances in which an alternative entity could be dissolved even in light of a “broad purpose” clause in its operating agreement. The Court stated:
Dissolution of an entity chartered for a broad business purpose remains possible upon a strong showing that a confluence of situationally specific adverse financial, market, product, managerial, or corporate governance circumstances make it nihilistic for the entity to continue. In other words, a petitioner might obtain dissolution by making a convincing showing that the perpetuation of the entity, irrespective of its managers’ intentions to pursue a business line allowed by its governing instrument, was obviously futile and would not result in business success. One need not speculate on exactly what circumstances of that type might suffice to make that showing in order to confidently conclude that [Petitioner] cannot state a claim for dissolution by simply alleging that a two-year-old LLC with a broad purpose clause has experienced some adversity and therefore ought to be dissolved. By that standard, investors could state a claim for dissolution against virtually all entities on a regular basis, especially in years of economic turbulence like this one. Id. at *3.
Similarly, in the case of In re Seneca Investments LLC, 970 A.2d 259 (Del. Ch. 2008), the Court of Chancery denied a petition to dissolve Seneca, which also contained a “broad purpose” clause in its operating agreement. Petitioner sought dissolution on the grounds that it had abandoned its business model. The Court found that given the broad purpose clause of the LLC’s operating agreement, using the LLC as a mere “passive instrumentality” was not unlawful and certainly not in violation of the purpose for which the LLC was formed.
Arrow and Seneca should be taken into consideration by any party seeking the involuntary dissolution of an alternative entity with a “broad purpose” clause in its operating agreement. Absent a “strong showing that a confluence of situationally specific adverse financial, market, product, managerial, or corporate governance circumstances make it nihilistic for the entity to continue”, the Court may be reluctant to grant dissolution of a “broad purpose” alternative entity.
Subsequent posts will discuss cases in which the Court has granted involuntary dissolution in spite of a “broad purpose” clause contained in the entity’s operating agreement.