The New York and Delaware LLC and Limited Partnership Acts both provide that an LLC or limited partnership may be dissolved “whenever it is not reasonably practicable to carry on the business in conformity with the [LLC articles of organization, operating agreement or limited partnership agreement].” [1] This is the standard, but what does it mean?
When can an LLC member or limited partner seek dissolution, with some reasonable basis to believe that he will be successful? These situations arise fairly frequently and there are no clear-cut rules. Many courts have noted the dearth of case law which explicitly define the standard of what it means for it not to be “reasonably practicable” to carry on the business in conformity with the entity’s governing documents.[2]
The starting point for a “reasonably practicable” analysis is always what these documents say. The documents take on great significance and small differences in their language can be decisive. For example, entity documents with broad “purpose” clauses are likely to give the managers much greater latitude as to what they can do and make them more impervious to efforts to cause dissolution. On the other hand, if the entity’s stated purpose includes generating “cash flow” or “profits,” a failure to do so is much more likely to lead to dissolution that if the documents are silent on this point.
Some courts have suggested that the standard for whether it is not “reasonably practicable” to carry on is met in two situations:
(1) Management is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved; or
(2) Continuing the entity is financially unfeasible.[3]
Ultimately, the determination of whether judicial dissolution is warranted is up to the equitable discretion of the courts. This means that the party seeking dissolution must show why it is not reasonably practicable to carry on the business as intended or that the entity will be unable to achieve financial success. Ultimately, it is a matter of degree and Courts have the latitude to find that even if the entity is not functioning as anticipated or is not profitable, it is still “reasonably practicable” to carry on the business, in which case, dissolution will not be granted.[4]
Management cannot or won’t permit the stated purpose of the entity to be realized
When determining whether the entity can operate in conformity with its governing documents[5], it has been held that the standard is not whether it is “impossible” for the entity to operate as intended, but rather the looser standard of not reasonably practicable.[6]
Some examples of when courts have found that an entity cannot function as intended include:
(a) When coequal managers are deadlocked in deciding the future direction of the company with no mechanism to solve the dispute;[7]
(b) Where there is “severe antagonism” between the members; [8]
(c) When there is misappropriation of assets;[9]
(d) When a partner refuses to permit inspect of books, record or documents;[10] and
(e) When there is gross misconduct and arbitrary management of the entity by the controlling managers.[11]
One recent Delaware decision held that the mere fact that an LLC member “might be disappointed that he has been ousted from the management of the company, disagree with the tack its current managers are taking, and wish to take his capital out of the company” is insufficient to constitute “reasonable impracticability.”[12] Similarly, mere disagreements among partners on how to best run the business organization are insufficient to constitute a lack of reasonable practicability.[13] The same applies where an LLC manager was increasing his own commissions without proportionately increasing the commissions of a non-manager when the entity was successful and profitable.[14]
Whether a breach of fiduciary duties is grounds for judicial dissolution is a subject of dispute. Some courts have explained that because a judicial dissolution is considered an extreme remedy, a mere fiduciary duty breach is insufficient to warrant dissolution because other more appropriate relief is available to the aggrieved parties.[15] Meanwhile, other courts have found that the breach of the fiduciary duty of loyalty warrants a judicial dissolution.[16]
Financial Unfeasibility
Courts have also found that it is not “reasonably practicable” to carry on as a business when the business operation has become financially unfeasible.[17] The cases indicate that it is not enough that the enterprise is unprofitable. Rather, the financial condition of the company must be such that there is no effective business to operate.[18] If it is obviously futile for the entity to achieve economic success regardless of who is running the company, then judicial dissolution may be appropriate.[19] Courts require this high bar be reached in order that stakeholders cannot seek judicial dissolution whenever there is slight turbulence in the business field, which is especially likely to happen in years of economic recession.[20]
Some examples of when courts have found an entity to be failing enough financially to justify a judicial dissolution include:
(a) When a company has no office, no capital funds and generates no revenue with no realistic expectation of obtaining additional funding or capital;[21]
(b) When a real estate partnership had mortgage debt in excess of its property’s value, and its only expected rent payments were due from an insolvent entity;[22] and
(c) When the sole asset of a company no longer existed.[23]
Unprofitable, but Financially Feasible
However, the courts will not order dissolution just because the business is unprofitable.[24] For example, the courts have denied petitions for dissolution when:
(a) The managers of a start-up had failed to fulfill the objectives of their business plan resulting in the company failing to turn a profit after two years[25];
(b) The party was disappointed that the company was not performing well as their competitors, and was not performing as well as their projected business plan, yet still turned a small profit.[26]
[1] New York Limited Partnership: “On application by or for a partner, the supreme court in the judicial district in which the office of the limited partnership is located may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.” N.Y.PTR. LAW § 121-802 : NY Code - Section 121-802: Judicial dissolution. New York LLC: “On application by or for a member, the supreme court in the judicial district in which the office of the limited liability company is located may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” New York Limited Liability Company Law - Article 7 - § 702 Judicial Dissolution. Delaware Limited Partnership: “On application by or for a partner the Court of Chancery may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.” § 17-802. Judicial dissolution. Delaware LLC: “On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” § 18-802. Judicial dissolution.
[2] E.g. In the Matter of 1545 Ocean Ave, LLC, 72 AD 3d 121 (NY. App. Div. 2d Dept. 2010) (“While there are no New York cases which interpret and apply this standard in the context of limited partnerships . . . .”); Schindler v. Niche Media, 1 Misc. 3d 713 (NY. Sup. Ct. 2003) (“While this standard has never been construed in the case law . . . .“).
[3] In the Matter of 1545 Ocean Ave, LLC, 72 AD 3d 121, 131 (NY. App. Div. 2d Dept. 2010).
[4] Matter of Extreme Wireless, 299 AD 2d 549, 559 (NY. App. Div. 2d Dept. 2002).
[5] See, e.g. Fisk Ventures, LLC v. Segal, No. 3017-CC (Del. Ct. Chancery 2009).
[6] Sriram v. Preferred Income Fund III Ltd., 22 F. 3d 498 (2d Cir. 1994).
[7] Vila v. Bvwebties LLC, No. 4308-VCS (Del. Ct. Chancery 2010).
[8] Tal v. Superior Vending, LLC, 2008, NY Slip Op 51205 (NY Sup. Ct. 2008).
[9] Duncan v. Bruce, 43 N.Y.S.2d 447 (N.Y.Sup.Ct.1943).
[10] Susman v. Cypress Venture, 449 N.E.2d 143, 148 (Ill. App. Div. 1982).
[11] Curley v. Brignoli Curley & Roberts Associates, 746 F. Supp. 1208 (SDNY 1989).
[12] In re Arrow Investment Advisors, LLC, No. 4091-VCS (Del. Ct Chancery 2009).
[13] See In the Matter of 1545 Ocean Ave, LLC, 72 AD 3d 121 (NY. App. Div. 2d Dept. 2010).
[14] Schindler v. Niche Media, 1 Misc. 3d 713(NY. Sup. Ct. 2003).
[15] E.g. In re Arrow Investment Advisors, LLC, No. 4091-VCS (Del. Ct Chancery 2009).
[16] E.g. May v. Flowers, 106 AD 2d 873 (NY App. Div. 4th Dept. 1984).
[17] Matter of Shure v Judicial Dissolution of S &S Eatery, LLC, 2012 NY Slip Op 50739 (NY. Sup. Ct. 2012).
[18] Fisk Ventures, LLC v. Segal, No. 3017-CC (Del. Ct. Chancery 2009) (explaining the judicial dissolution for economic unfeasibility requires 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”).
[19] In re Arrow Investment Advisors, LLC, No. 4091-VCS (Del. Ct Chancery 2009).
[20] Id.
[21] Id.
[22] PC Tower Center, Inc v. Tower Development Associates Limited Partnership, No 10788, 1989 Del. Ch. LEXIS 72 (Del Ct. Chancery 1989).
[23] In re Silver Leaf, 2005 WL 2045641, (Del. Ct. Chancery 2005).
[24] In re Arrow Investment Advisors, LLC, No. 4091-VCS (Del. Ct Chancery 2009).
[25] Id.
[26] Cincinnati Bell Cellular Sys. Co. v. Ameritech Mobile Phone Serv. of Cincinnati, Inc., No. 13389, 1996 WL 506906 (Del. Ct. Chancery 1996).