Standing to Effectuate a Judicial Dissolution in Delaware

Alternative entities such as limited partnerships and limited liability companies are creatures of contract, so the first place to look for standards governing dissolution is the applicable LLC agreement or partnership agreement.[1]  The statutes themselves provide little guidance on their face with respect to a number of aspects of dissolution, but standards may be gleaned by comparing the language of different sections of the applicable Act.[2]
 
Of particular interest are those provisions of the alternative entity statutes that allow members (or partners) to seek judicial dissolution.  The Delaware Limited Liability Company Act (the “LLC Act”) states in relevant part:
 
“On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.[3]
 
The Delaware Revised Uniform Limited Partnership Act (“LLP Act”) contains a nearly identical provision:
 
On application by or for a partner the Court of Chancery may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.[4]
 
The question frequently arises of who has standing to pursue judicial dissolution under these Acts.  With respect to a limited liability company, “Member” is defined as “a person who is admitted to a limited liability company as a member as provided in § 18-301 of this title[.]”[5]  “Manager” is defined as: “a person who is named as a manager of a limited liability company in, or designated as a manger of a limited liability company pursuant to, a limited liability company agreement or similar instrument under which the limited liability company is formed[.]”[6]  The LLP Act limits standing to seek judicial dissolution to a “partner” defined as either “a limited or general partner.”[7]

What this means is that broad classes of interested parties do not have standing to petition the Court of Chancery for the dissolution of an alternative entity. Among them are:
 
•      An “acting manager.”  For certain purposes under the LLC Act, a person who is not technically a “manager” under the applicable operating agreement may still be regarded legally as a manager:

… the term “manager” refers (i) to a person who is a manager as defined in § 18-101(10) of this title and (ii) to a person, whether or not a member of a limited liability company, who, although not a manager as defined in § 18-101(10) of this title, participates materially in the management of the limited liability company[.][8]

•      An assigning member:

Unless otherwise provided in a limited liability company agreement … 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 the member’s limited liability company interest.[9]

•      An assignee:

Unless otherwise provided in a limited liability company agreement … An assignment of a limited liability company interest does not entitle the assignee to become or exercise any rights or powers of a member[.][10]

•      A judgment creditor:

The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or a member's assignee may satisfy a judgment out of the judgment debtor's limited liability company interest and attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has 1 member or more than 1 member.[11]

 



[1] E.g., 6 Del. C. § 18-1101 (“It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”)
 
[2] See, e.g., 6 Del. C. §§ 17-801, 17-802; 18-801, 18-802.
 
[3] 6 Del. C. § 18-802.
 
[4] 6 Del. C. § 17-802.
 
[5] 6 Del. C. § 18-101(11).
 
[6] 6 Del. C. § 18-101(10).
 
[7] 6 Del. C. § 17-101(11).
 
[8] 6 Del. C. § 18-109(a) (emphasis added).
 
[9] 6 Del. C. § 18-702(b)(3).
 
[10] 6 Del. C. § 18-702(b)(1).
 
[11] 6 Del. C. § 18-703(d); compare, e.g., 6 Del. C. § 17-703(d) (“The entry of a charging order is the exclusive remedy by which a judgment creditor of a partner or of a partner's assignee may satisfy a judgment out of the judgment debtor's partnership interest and attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor.”)

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