Chancery Denies Non-Member, Non-Manager’s Bid for Equitable Dissolution of LLC
While the Court of Chancery has recognized the concept of equitable standing to seek judicial dissolution, this case shows that equity is not a tool to rewrite the plain language of an operating agreement or to help a party regain the rights it bargained away.
A holding company indirectly controlled by Plaintiff formed Defendant with the purpose of constructing a solar power plant in Nevada. Defendant secured funding through the Department of Energy (“DOE”). After construction issues and delays, Defendant defaulted. DOE foreclosed and exercised its contractual option to replace Plaintiff’s appointees on the holding company’s board of managers. DOE’s foreclosure rights also prevented the holding company from exercising any ownership rights until Defendant cured the default.
Feeling cut out, Plaintiff sought dissolution of Defendant. Because Plaintiff was neither a member nor a manager of Defendant, Plaintiff lacked standing to seek dissolution under Delaware’s LLC Act. And Defendant’s operating agreement also provided no dissolution rights to Plaintiff. So, Plaintiff took the “far less-traveled path” and sought dissolution purely as a matter of equity.
Although the Court agreed that it had the power equitably dissolve Defendant, the Court noted that a claim for equitable dissolution requires a petitioner to plead a convincing basis for the Court to rely upon equity and override the LLC Act and the company’s operating agreement. Plaintiff could not meet that standard because Plaintiff’s position was the result of the “calculated choices” it made – which included restructuring to add an intermediate holding company between itself and the defendant, adding an investor at the holding company level and agreeing to have the holding company pledge all of its membership interests as collateral – all “in order to secure additional funding.” This distinguished the case from In re Carlisle Etcetera, LLC, 114 A.3d 592 (Del. Ch. 2015), where the Court granted equitable dissolution to uphold the petitioner’s rights and reasonable expectations in circumstances where the LLC had not clearly delineated its members or otherwise followed basic formalities even though the petitioner lacked standing under the LLC Act. Plaintiff’s reliance on Carlisle was misplaced because granting equitable dissolution in these circumstances “would not be ‘upholding’ [Plaintiff’s] rights” but rather “creating new ones [Plaintiff] did not bargain for or reasonably expect.” Thus, while Plaintiff might have other remedies available, it could not plead a basis for equitable dissolution.Share