In disputes between business owners, a co-owner will commonly assert a claim for judicial dissolution. However, business owners and practitioners must be aware of the significant differences between Washington’s standards for judicial dissolution between different business entity types. The most common business entities in Washington include LLCs and corporations, but the statutory scheme behind judicial dissolution claims varies substantially.
Judicial Dissolution for Washington LLCs
RCW 25.15.274 sets forth Washington’s standard for judicial dissolution for LLCs and identifies two standards under which a Court will dissolve an LLC:
- When it is not reasonably practicable to conduct the company’s activities in conformity with its certificate of formation and LLC agreement, or
- When other circumstances render dissolution equitable.
These two standards are very broad, and there is limited case law in Washington identifying the specific conduct that satisfies either standard. However, deadlock among co-owners likely satisfies Washington’s standard for judicial dissolution, particularly given substantial authority from other jurisdictions, such as Delaware, with similar statutory schemes.
Judicial Dissolution for Washington Corporations
For Washington corporations, RCW 23B.14.300 sets forth the standard for judicial dissolution. Contrary to the standard with LLCs, the standard for dissolving a corporation is far more specific and rigid. Under RCW 23B.14.300 a shareholder must establish a specified statutory ground, such as qualifying director deadlock, illegal, oppressive, or fraudulent conduct by those in control, or qualifying shareholder deadlock. Unlike the LLC standard, corporate deadlock alone may be insufficient: the statute also requires threatened or actual irreparable injury to the corporation, or that the corporation’s business and affairs can no longer be conducted to the shareholders’ general advantage.
Commonalities and Practical Takeaways
Even when a statutory ground for dissolution exists, dissolution for either entity will remain discretionary rather than automatic. The court must weigh equitable considerations, including the seriousness of the conduct, the entity’s ability to operate profitably notwithstanding the conduct, and the impact of the conduct on third parties (e.g. employees, customers, vendors, etc.). Courts also will likely apply the same alternative remedies to judicial dissolution, which I recently discussed here, regardless of the entity at the center of the dispute. But regardless of which entity is at issue, practitioners and clients must maintain a fundamental understanding of the business entity involved and Washington law’s controlling standard for determining judicial dissolution.
The Business Lawyers at Beresford Booth have extensive experience dealing with all types of business challenges and disputes. Contact us at info@beresfordlaw.com or (425) 776-4100 to see how we can help.