The Washington LLC Act provides “courts may order dissolution of a limited liability company whenever: (1) it is not reasonably practicable to carry on the limited liability company’s activities in conformity with the certificate of formation and the limited liability company agreement; or (2) other circumstances render dissolution equitable.” RCW 25.15.274. This begs the question: when is it “not reasonably practicable to carry on the limited liability company’s activities”?
What Constitutes Deadlock? – In re Dissolution of Doehler Dry Ingredients LLC
Last month, the Delaware Chancery Court (see the similarities between Delaware and Washington judicial dissolution statutes below) discussed whether a contrived deadlock constitutes sufficient deadlock under §18-802 of the Delaware LLC Act. See In re Dissolution of Doehler Dry Ingredient Solutions, LLC, 2022 WL 4281841 (Del. Ch. 2022)
In Doehler, Davis, a 25% member in Doehler Dry Ingredients LLC (“Doehler LLC”) petitioned for dissolution on grounds of certain “irreconcilable differences” with Doehler LLC’s other members and managers. Davis argued that the Doehler LLC Agreement provided nine other “critical actions” which require unanimous approval of the members “but for which Davis, as a member, does not approve.” Essentially, Davis was prospectively creating deadlock by declaring his future intentions to “not agree” to the “nine critical actions”.
The respondents answered, arguing that petitioner Davis’ allegations “[did] not rise to the level of corporate dysfunction required for judicial dissolution”. In other words, it was still reasonably practicable to carry on the activities of Doehler LLC. Further, the respondents argued that the Doehler LLC Agreement “provides a procedure for resolving deadlock” – namely a buy-sell option (of which I discuss here). Davis did not avail himself of the LLC Agreement’s procedure for resolving deadlock.
Vice Chancellor Will dismissed the Davis’ dissolution petition holding Davis’ assertion of deadlock based on his own declared intent to withhold future consents from the “nine critical actions” was a “contrived attempt to manufacture deadlock.” Vice Chancellor Will contextualized the holding, stating, “[g]iven its extreme nature, judicial dissolution is a limited remedy that this court grants sparingly.” Davis’ contention that he would decline to approve any of the “nine actions critical to the LLC” for which unanimous consent is required “fail[ed] to identify any existing deadlock.” Rather, Vice Chancellor Will held it “concerns prospective deadlock of the petitioner withholds future consent. This [is a] contrived attempt to manufacture deadlock [and] cannot support a claim for judicial dissolution.”
Vice Chancellor Will concluded that, had Davis adequately alleged existing deadlock, dissolution would nonetheless be unavailable to him because the deadlock could be remedied through a legal mechanism set within the four corners of Doehler’s LLC Agreement.
Delaware LLC Act Compared to the Washington LLC Act
Section 18-802 of the Delaware LLC Act is identical to RCW 25.15.274, except Delaware omits Washington’s inclusion of equitable dissolution. While Washington has not specified its “reasonably practicable” standard, some Delaware cases may provide guidance. In Fisk Ventures, the Delaware Chancery Court explained, “[t]he text of § 18-802 does not specify what a court must consider in evaluating the “reasonably practicable” standard, but several convincing actual circumstances have pervaded the case law: (1) the members’ vote is deadlocked at the Board level; (2) the operating agreement gives no means of navigating around the deadlock; and (3) due to the financial condition of the company, there is effectively no business to operate.” See Fisk Ventures, LLC, v. Segal, 2008 WL 1961156 (Del. Ch. 2008).
Judicial dissolution is not an easy remedy to acquire. As Vice Chancellor Will explained, judicial dissolution is of an extreme nature and will only be granted sparingly. The contriving of a prospective deadlock does not rise to a sufficient level of deadlock warranting judicial dissolution, only existing deadlock may do so. Additionally, even if existing deadlock remains, judicial dissolution can be a challenging remedy to acquire.
For any questions regarding judicial dissolution, give me a call at 425-776-4100, or email me at email@example.com.