Delaware Court of Chancery Grants Dissolution of Deadlocked Corporation

In his decision in In the Matter of Bermor, Inc., C.A. No. 8401-VCL (Del. Ch. Feb. 9, 2015), Vice Chancellor Travis Laster of the Delaware Court of Chancery provides a concise analysis of the requirements for the court to order dissolution of a corporation owned by two 50%-50% deadlocked shareholders under 8 Del. C. § 273. The case revolved around two corporations each owned by two 50% shareholders, one of whom petitioned for dissolution on the grounds that the  shareholders were hopelessly deadlocked.

The relevant portion Delaware General Corporation Law reads:

If the stockholders of a corporation of this State, having only 2 stockholders each of which own 50% of the stock therein, shall be engaged in the prosecution of a joint venture and if such stockholders shall be unable to agree upon the desirability of discontinuing such joint venture and disposing of the assets used in such venture, either stockholder may, unless otherwise provided in the certificate of incorporation of the corporation or in a written agreement between the stockholders, file with the Court of Chancery a petition stating that it desires to discontinue such joint venture and to dispose of the assets used in such venture in accordance with a plan to be agreed upon by both stockholders or that, if no such plan shall be agreed upon by both stockholders, the corporation be dissolved. Such petition shall have attached thereto a copy of the proposed plan of discontinuance and distribution and a certificate stating that copies of such petition and plan have been transmitted in writing to the other stockholder and to the directors and officers of such corporation. The petition and certificate shall be executed and acknowledged in accordance with § 103 of this title.

8 Del. C. § 273(a).  The party opposing dissolution raised four principal arguments. Although the entirety of Vice Chancellor Laster's opinion is worth reading, his pithy responses to these three arguments are particularly noteworthy:

1. Duration of the underlying dispute.

Claire [the party opposing dissolution] has argued that the dispute has not lasted long enough to warrant dissolution. Although McKinney-Ringham, on which she relies, did involve a relationship that deteriorated over a prolonged period, Section 273 does not require extended suffering. See In re Venture Advisers, Inc., 1988 WL 127096, at *1 (Del. Ch. Dec. 1, 1988) (finding that the deterioration of a business relationship between two 50% stockholders over the course of a year was sufficient to deny a motion to dismiss a petition for dissolution under Section 273). "Section 273 exits to enable deadlocked shareholders to bring closure to what has become an inefficient and unworkable relationship." In re Magnolia Clinical Research, Inc., 2000 WL 128850, at *2 (Del. Ch. Jan. 3, 2000). It does not mandate that parties struggle until they have destroyed their relationship entirely and jeopardized their business.

Bermor, Mem. Op. at 7.

2. The underlying dispute exists not at the corporate level, but at the level of their subsidiaries, limited partnerships not governed by the Delaware General Corporation Law.

The Vice Chancellor dispenses with this argument with alacrity, noting:

Claire also has argued that any dispute exists at the limited partnership level and not the general partner level. The LP Agreements grant the General Partners the exclusive ability to manage and control the Partnerships. Any management [within the limited partnership] dispute necessarily occurs at the general partner level.

Bermor, Mem. Op. at 7-8.

3. The party seeking dissolution has indicated that he does not wish to dissolve the limited partnership subsidiaries, which would be a necessary and natural consequence of the corporate dissolution.

"Simply because [the general partner] may have interests in or responsibilities related to other non-Delaware entities of differing structures does not mean [the general partner] may not be a distinguishable, independent joint venture enterprise" for purposes of dissolution under Section 273. McKinney-Ringham, 1998 WL 118035, at *3. The General Partners are Delaware corporations that are separate and distinct from the Partnerships. To resolve the disagreement at the general partner level, Louis may seek to dissolve the General Partners under Section 273. He may do so even if he has misgivings and might prefer a different course.

Bermor, Mem. Op. at 8.

4. The petition for dissolution is brought in bad faith or as a mechanism to extort acquiescence with the moving party's proposals.

The Court noted that the standard for establishing bad faith is extremely high, and analyzed two specific acts by the moving party which the non-moving party claimed were evidence of bad faith. The Court found innocent explanations for both acts which precluded a finding of bad faith.

As to the alleged ulterior motives of the petitioner, the Court held:

Finally, Claire characterizes the petition as a means to "extort the Cohens into yielding to [Louis'] refinancing proposal and corporate amendments." Dkt 3 at 18. The fact one who seeks his statutory entitlement to dissolve the enterprise in order to extract his investment from it may incidentally benefit from
dissolution cannot be a basis for the Court to deny an otherwise appropriate petition. It frankly seems unlikely one would ever petition for dissolution
until one concluded the benefits derived from the continued association with the enterprise were outweighed by the disadvantages flowing from the
continued operation. McKinney-Ringham, 1998 WL 118035, at *5. Because there is nothing to suggest that '''the actual foundation for this action' is something other than 'a genuine inability to agree upon the desirability of discontinuing this joint venture, '" the petition is granted.

Bermor, Mem. Op. at 9.

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