An involuntary dissolution action is an important remedy for any partner, member or manager of a Delaware alternative entity (an LLC, LLP, GP or LP, defined below) to force dissolution of a Delaware company. Prior posts from December 2013 discussed the standard imposed by the Court of Chancery for a partner, member or manager to obtain an involuntary dissolution of these alternative entities (click here for link to one of these posts).
Under the Delaware Limited Liability Act (the “LLC Act”), the proper party with standing to assert an involuntary dissolution proceeding is either a member or manager of the LLC. Under Delaware Revised Uniform Partnership Act (“DRUPA”), or the Delaware Revised Uniform Limited Partnership Act (“DRULPA”), a partner of such general partnership (“GP”), limited liability partnership (“LLP”), or limited partnership (“LP”) has standing to bring such an action.
To obtain an involuntary dissolution under the LLC Act, DRUPA, or DRULPA, a showing is required that it is “not reasonably practicable to carry on the business” in conformity with the entity’s governing documents.
What does “not reasonably practicable to carry on the business” with the entity’s governing documents mean? One must first look to what the governing documents say regarding the purpose of the business. The Delaware Court of Chancery relies heavily on the “freedom of contract” approach in connection with interpreting the operating agreements of alternative entities. Therefore, the Delaware Court of Chancery has interpreted this clause to mean that a company cannot do what its operating agreement directs it to accomplish.
For example, the Chancery Court granted dissolution under Section 18-802 of the LLC Act where the members were deadlocked and the LLC lost its sole client. The operating agreement required that decisions be made by a “majority”, and provided no mechanism for deadlock. The court reasoned that the LLC’s sole purpose of servicing that client no longer existed, and therefore it was not possible to continue the business. See In re Silver Leaf LLC, 2005 WL 2045641, at *10 (Del. Ch. Aug. 18, 2005) (citing P.C. Tower Ctr. Inc, v. Tower Ctr. Dev. Assoc. LP, 1989 WL 63901 (Del. Ch. June 8, 1989)).
Subsequent posts will discuss additional Delaware cases interpreting the “reasonably practicable” standard, including those confronted with “broad purpose” clauses implemented by alternative entities in their operating agreements.