In re Carlisle Etcetera LLC
Not available in text (2015)
Rule of Law:
The Delaware Court of Chancery possesses inherent equitable jurisdiction to order the dissolution of a limited liability company (LLC), even where statutory standing for dissolution is lacking, particularly when the LLC is deadlocked, operating contrary to its governance structure, and an assignee treated as a member in substance seeks such relief.
Facts:
- In 2012, Well Union Capital Limited (WU Parent) and Tom James Company (James) formed Carlisle Etcetera LLC (Carlisle), each contributing $11.1 million for a 50% member interest, agreeing to work on a more detailed operating agreement.
- WU Parent transferred its member interest in Carlisle to its wholly owned subsidiary, Well Union U.S. Holdings, Inc. (WU Sub).
- James knew about, did not object to, and treated WU Sub as a member from that point on, including identifying WU Sub as a 50% member in tax filings and draft agreements.
- The Initial LLC Agreement established a manager-managed LLC with a four-member Board, with WU Parent and James each appointing two members, and all Board decisions requiring unanimous approval.
- The Board became deadlocked 2-2 on key issues, preventing the Company's duly authorized manager from exercising its authority.
- During the deadlock, a James executive, designated as the Company's CEO, controls Carlisle's day-to-day operations without oversight.
- James explicitly told Royal Spirit (WU Parent's group) that it no longer wished to continue the joint venture and proposed a buyout, but negotiations stalled, with James leveraging its operational control.
Procedural Posture:
- Well Union U.S. Holdings, Inc. (WU Sub) filed a petition in the Delaware Court of Chancery seeking judicial dissolution of Carlisle Etcetera LLC.
- Tom James Company (James) moved to dismiss WU Sub's petition on the grounds that WU Sub lacked standing to seek a judicial dissolution under Section 18-802 of the LLC Act.
- WU Sub filed an amended petition that added Well Union Capital Limited (WU Parent) as a co-petitioner.
- James renewed its motion to dismiss the amended petition.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an assignee of a limited liability company interest, or the assignor, have standing to petition for statutory dissolution under 6 Del. C. § 18-802, or, alternatively, does such an assignee have standing to seek dissolution in equity, particularly when the LLC is deadlocked and operating contrary to its governing agreement?
Opinions:
Majority - Laster, Vice Chancellor
No, neither WU Parent nor WU Sub has standing to petition for statutory dissolution under Section 18-802 of the LLC Act, because they do not meet the statutory definition of a 'member' or 'manager' for that purpose. However, yes, WU Sub does have standing to seek dissolution in equity. The court found that Section 18-802 strictly limits statutory dissolution to 'members' or 'managers.' WU Parent ceased to be a member upon assigning its interest to WU Sub, as per 6 Del. C. § 18-702(b)(3). WU Sub, as an assignee, did not automatically become a member; under 6 Del. C. §§ 18-301(b)(2) and 18-704(a), a 'permitted admission' requires the 'affirmative vote or written consent of all of the members,' which was not alleged to have occurred formally, despite James treating WU Sub as a member. Therefore, neither petitioner could seek statutory dissolution. However, the court held that Section 18-802 is not the exclusive means to obtain LLC dissolution, and the Court of Chancery retains inherent equitable jurisdiction. Citing 6 Del. C. § 18-1104, which states that 'the rules of law and equity' govern cases not provided for in the LLC Act, the court reasoned that divesting its traditional equitable jurisdiction would raise constitutional questions under Article IV, Section 10 of the Delaware Constitution, which vests the Court of Chancery with general equity jurisdiction that evolves to meet new exigencies. The court emphasized that LLCs are not purely contractual entities, as they leverage sovereign-provided benefits like separate legal existence and limited liability, giving the state an interest in oversight. In this case, equity demands intervention because the parties initially formed as equal partners with the intention reflected in a draft agreement that affiliate transfers would automatically confer membership. James's knowledge of and participation in WU Sub's status, coupled with the deadlock and James's exploitation of its de facto control, made it inequitable to force WU Sub to remain a powerless investor. Applying the principles that 'equity regards substance rather than form' and 'equity always attempts to ascertain, uphold, and enforce rights and duties which spring from the real relations of parties,' the court concluded that WU Sub, as an assignee and equitable owner, has standing to seek dissolution in equity, consistent with prior Delaware precedents regarding equitable owners.
Analysis:
This case significantly clarifies the distinction between statutory and equitable standing for LLC dissolution in Delaware. It reinforces the Court of Chancery's inherent equitable powers, asserting that legislative enactments, while defining statutory remedies, cannot fully divest the court of its constitutionally vested equitable jurisdiction, especially when no adequate legal remedy at law exists. The ruling underscores that Delaware LLCs, despite their contractarian nature, are not purely private arrangements and are subject to judicial oversight when equity demands. This decision provides an important avenue for relief for disadvantaged or 'locked-in' non-statutory members or assignees in deadlocked LLCs, preventing one party from exploiting a power vacuum created by the governance structure, thus promoting fairness in closely held entities.
