Going into business with a partner, or partners, is exciting. But when things stop working, it’s sometimes difficult to know how to get out. Fortunately, there are several ways an owner can exit a business. Determining which options are available and which option to choose depends on the circumstances of each case. Sometimes the answer is clear because the parties can either agree to a buyout or simply follow their buyout procedure laid out in their governing documents. However, not all cases work out that way. Just because you don’t have a clearly defined exit does not mean you cannot get out of business with your partner(s).
Judicial Dissolution
When the obvious options fail, the law provides a last-resort option: judicial dissolution. This is when a court orders the business to be dissolved. Washington law permits judicial dissolution if continuing the business is “not reasonably practicable.” It’s important to note that Washington courts have not defined the precise contours of what “not reasonably practicable” means under the statute. However, in a recent Washington case, In re Dissolution of Apogee Capital LLC, the Washington Court of Appeals applied the “not reasonably practicable” standard to dissolve a business.
Washington Application of “Not Reasonably Practicable” Standard
In Apogee, a dispute arose between two members with identical 50/50 ownership interests. Because their operating agreement required consensus for major decisions, their deadlock meant the LLC could no longer function or be dissolved. The trial court ultimately held that, under these circumstances, it was “impossible now for the parties to fully exercise their rights under this operating agreement,” analogizing the situation to a contract void for impossibility of performance. The Court upheld the finding that it was not reasonably practicable for the LLC to carry on its activities and dissolved the LLC.
While Washington Courts have not defined the “not reasonably practicable” standard, as discussed in a prior post, Washington Courts look to influential corporate jurisprudence from Delaware to interpret this standard. Delaware has a near identical judicial standard to Washington with respect to the not reasonably practicable standard.
Delaware Interpretation of “Not Reasonably Practicable” Standard
In Delaware, the seminal case is for this standard is Haley v. Talcott, 864 A.2d 86 (2004). The Haley court judicially dissolved a two-member, 50/50, manager-managed LLC which owned and leased land to a restaurant. Haley set forth three prerequisites for judicial dissolution of two member LLCs under Delaware’s “not reasonably practicable” standard:
- Deadlock: the LLC must have two 50% members/managers;
- Business Purpose: those members/managers must be engaged in a joint venture; and
- Dispute: they must be unable to agree upon whether to discontinue the business or how to dispose of its assets.
These factors highlight when the court may step in because the company simply cannot move forward.
Most business breakups are resolved through buyouts or negotiation. But if you are stuck in a deadlock with no way out, judicial dissolution may be the only option.
The Business Lawyers at Beresford Booth have extensive experience and regularly advise business owners facing these issues. If you are considering leaving your company, we can help you evaluate your options and protect your interests. Contact us at info@beresfordlaw.com or call (425) 776-4100 to see how we can help.