In Re Doehler Dry Ingredient Solutions, LLC
MEMORANDUM OPINION, Date Submitted: July 8, 2022, Date Decided: September 15, 2022 (2022)
Rule of Law:
Judicial dissolution of a Delaware limited liability company (LLC) under 6 Del. C. § 18-802 is an extreme and sparingly granted remedy, requiring a showing that it is not reasonably practicable to carry on the business in conformity with the operating agreement, which is not satisfied by mere member disputes, alleged breaches of fiduciary duty, or contrived threats of future deadlock, especially when the LLC agreement provides contractual mechanisms to resolve such issues.
Facts:
- Doehler Dry Ingredient Solutions, LLC ("Doehler"), a Delaware LLC, was formed in 2017 to operate in the business of buying, sourcing, manufacturing, producing, distributing, packaging, marketing, and selling dry foods.
- Doehler is governed by an Operating Agreement (the "LLC Agreement") and managed by a Board of Managers.
- Petitioner Russell Davis was a manager and beneficial owner of 25% of Doehler through his controlled entity, Crosskeys Associates Limited.
- Respondent Doehler North America, Inc. ("DNA") holds 50% of Doehler's membership interests, and respondent Garry Beckett owns 25% and remains a manager.
- By March 2022, disputes emerged between Russell Davis and the other members of Doehler.
- On March 24, 2022, members representing a majority of Doehler's membership interests voted by written consent to remove Russell Davis as a manager of the Company and limit his ability to invoice the Company for compensation for services.
- On the same day, Russell Davis accused Garry Beckett of hacking his corporate email account and sharing information with respondent Andreas Klein, who is the chair of DNA’s parent company.
- Russell Davis also alleged other disagreements, including that at least one member argued a prior separate agreement's terms controlled over the LLC Agreement, Garry Beckett formed competing companies using Doehler resources, and Doehler incurred more than $25,000 of debt without unanimous member consent.
Procedural Posture:
- On April 20, 2022, Doehler North America, Inc. ("DNA") filed an action against Russell Davis and Crosskeys Associates Limited in the United States District Court for the District of Delaware (the "Federal Action"), alleging breach of the LLC Agreement and seeking specific performance for the sale of Crosskey's units in Doehler to DNA.
- On April 21, 2022, Russell Davis (petitioner) filed a petition in the Delaware Court of Chancery, seeking judicial dissolution of Doehler under 6 Del. C. § 18-802 and the winding up of Doehler's affairs under 6 Del. C. § 18-803.
- Respondents Doehler North America Inc., Stuart McCarroll, and Andreas Klein filed a motion to dismiss or stay the Delaware action.
- Russell Davis, the petitioner, filed a motion for partial summary judgment.
- On July 15, 2022, the United States District Court for the District of Delaware denied a motion by Russell Davis to stay the Federal Action pending the resolution of the Delaware action.
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Issue:
Does a minority member's petition, alleging irreconcilable differences, removal as a manager, alleged breaches of fiduciary duty, and threats of future voting deadlock, sufficiently state a claim for judicial dissolution of a Delaware LLC under 6 Del. C. § 18-802 when the operating agreement provides mechanisms to address deadlock?
Opinions:
Majority - Vice Chancellor Will
No, Russell Davis's petition does not sufficiently state a claim for judicial dissolution because the alleged dysfunction and contrived deadlock fall well short of the high bar to plead that it is not reasonably practicable for the company to carry on its business in conformity with its LLC agreement. The court explained that judicial dissolution is a limited and extreme remedy granted sparingly, reserved for situations where an LLC's management is so dysfunctional, or its business purpose so thwarted, that it is no longer practicable to operate, such as in an actual voting deadlock or where the defined purpose is impossible to fulfill. Here, Davis failed to allege facts supporting an existing voting deadlock, instead focusing on a prospective deadlock where he threatened to withhold future consent for actions requiring unanimity; the court explicitly stated that a contrived attempt to manufacture deadlock cannot support such a claim. Furthermore, even if deadlock were adequately alleged, the LLC Agreement provides contractual mechanisms to resolve disputes, including a "Buy-Sell Option" (Section 10(b)) and a contractual process for dissolution (Section 12), which Davis did not utilize or reference. The petition also failed to demonstrate that Doehler's defined business purpose (operating in the dry foods business) had become impossible to fulfill, as there was no inference that the company was not currently performing these functions. Mere disagreements, alleged breaches of the LLC Agreement, or claimed breaches of fiduciary duty, even if true, do not suggest that the company is unable to operate in accordance with its governing document. Consequently, because the predicate claim for judicial dissolution failed, the associated claim to wind up Doehler's affairs under 6 Del. C. § 18-803 also failed.
Analysis:
This case significantly clarifies and reinforces the high legal threshold for judicial dissolution of a Delaware LLC, demonstrating the Court of Chancery's reluctance to intervene in member disputes unless truly extreme circumstances exist. It underscores that parties are generally expected to exhaust contractual remedies within their LLC agreements before seeking judicial relief, prioritizing freedom of contract and the stability of the entity. The ruling sets a clear precedent that member dysfunction, alleged breaches, or manufactured/threatened deadlock, absent an actual inability for the company to function according to its purpose, will not satisfy the 'not reasonably practicable' standard under Delaware law. This strengthens the protection against minority oppression claims for dissolution and encourages robust dispute resolution provisions in LLC agreements.
