In re Carlisle Etcetera LLC, C.A. No. 10280-VCL (Del. Ch. Apr. 30, 2015) (Laster, V.C.)

In this opinion, the Court of Chancery granted in part and denied in part respondent’s motion to dismiss a petition to dissolve Carlisle Etcetera LLC (“Carlisle”).  Notably, the Court recognized a cause of action for equitable dissolution of a Delaware limited liability company.  The Court also held that an assignee of a membership interest in a Delaware limited liability company has standing to bring an equitable dissolution claim even though only a member or manager has standing to bring a claim for statutory dissolution under Section 18-802 of the Delaware Limited Liability Company Act (the “Delaware LLC Act”).  The Court accordingly dismissed petitioners’ statutory dissolution claim but upheld its equitable dissolution claim.

In 2012, respondent, Tom James Company (“James”), and The Royal Spirit Group (“Royal Spirit”) created Carlisle, a joint venture Delaware limited liability company, to acquire and operate a manufacturing and retailing business of custom clothing.  Royal Spirit formed Well Union Capital Limited (“WU Parent”) as the vehicle through which Royal Spirit would participate in the joint venture.  Each contributed equal capital and received a 50% member interest.

Carlisle’s limited liability company agreement (the “LLC Agreement”) created a board to manage the company, of which WU Parent and James had a right to appoint two of the four members.  All board decisions required unanimous approval.  The LLC agreement also designated the CFO of James to serve as the CEO of Carlisle.

Later in 2012, WU Parent formed a subsidiary, Well Union U.S. Holdings, Inc. (“WU Sub”).  WU Parent attempted to transfer its member interest in Carlisle to WU Sub for tax purposes.

James and Royal Spirit developed disagreements about the management and operation of Carlisle.  They attempted to negotiate a buyout, but the process eventually stalled.  James, however, could perpetuate deadlock at the management level through its 50% control of the board while simultaneously operating the company through its control over Carlisle’s CEO, who was also James’ CFO. 

Accordingly, Royal Spirit, through WU Parent and WU Sub, petitioned the Court to dissolve Carlisle under 6 Del. C. § 18-802 and the Court’s equitable power to dissolve business entities.  James moved to dismiss for lack of standing because neither WU Parent nor WU Sub were “member[s]” of Carlisle.

The Court first evaluated petitioners’ statutory dissolution claim and dismissed it.  The Court noted that, under the plain language of Section 18-802, only a “member” or “manager” of a limited liability company has standing to petition for statutory dissolution.  The Court found that neither of the petitioners were “member[s]” of Carlisle.  Although WU Parent initially was a member, it lost its member status by operation of law when it assigned all of its membership interest to WU Sub.  Under Section 18-702(b)(3) of the Delaware LLC Act, a “member ceases to be a member and to have the power to exercise any rights or powers of a member upon assignment of all of the member’s limited liability company interest.”  Further, WU Sub did not become a member of Carlisle when WU Parent assigned its member interest to it.  Under Section 18-702(b)(1) of the Delaware LLC Act, “[u]nless otherwise provided in a limited liability company agreement.... [a]n assignment of a limited liability company interest does not entitle the assignee to become or to exercise any rights or powers of a member.”  Because Carlisle’s LLC Agreement did not provide otherwise, WU Parent’s assignment of its member interest to WU Sub left neither entity as a member of Carlisle, and therefore they each lacked standing to petition for dissolution under Section 18-802 of the Delaware LLC Act.

The Court rejected the argument that WU Sub became a “de facto member” of Carlisle simply because Carlisle’s records reflected that WU Sub was a member.  Although Section 18-301(b)(2) of the Delaware LLC Act states that an assignee becomes a member “when any such person’s permitted admission is reflected in the records of the limited liability company,” the Court held that this provision governs the timing of admission of an otherwise properly admitted member and does not provide an alternate condition to attain member status.  An assignee must still satisfy the conditions of 6 Del. C. § 18-704 to become a member.

The Court then found that the petition stated a claim for equitable dissolution.  In so finding, the Court held that Section 18-802 of the Delaware LLC Act, providing for judicial dissolution of limited liability companies, did not displace the Court’s power to order equitable dissolution of a limited liability company.  The Court noted that under the Delaware Constitution, the Court of Chancery is vested with “all of the general equity jurisdiction of the High Court of Chancery of Great Britain as it existed prior to the separation of the colonies,” except where an adequate remedy at law exists.  This jurisdiction includes authority to order dissolution of business entities where equity so requires.  The Court reasoned that the situation facing the parties, where petitioners were relegated to passively investing in a company of which they originally negotiated to be co-equal operators, was one that equity could remedy and for which no adequate remedy at law existed.  The Court accordingly upheld the petition for dissolution.

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