Chancery Holds That a Deadlock Warranting Dissolution Can Be Genuine Even If the Circumstances Giving Rise to the Deadlock Were Contrived

Morris James LLP

Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021)

In a dispute over the validity of the dissolution of a limited liability company, the Court of Chancery held in a post-trial opinion that a deadlock between LLC managers was genuine and deserving of legal effect, even though the circumstances giving rise to the deadlock were contrived.

Under Delaware law, for it to be given legal effect as a basis for dissolution, a deadlock must be the product of a genuine, good faith disagreement. A deadlock does not exist, for example, where one side has manufactured it by simply refusing to consider an issue. Here, the Court faced the unique scenario in which there were genuine disagreements between the managers of a company, but the circumstances giving rise to the deadlock were contrived. The operating agreement for the company provided that its two-person board of managers required a unanimous vote to avoid a deadlock, and, if the board was deadlocked, then the company would be dissolved. After the parties’ business relationship had soured over a period of years, the defendant sought to remove the plaintiff as a manager knowing that there would not be a unanimous vote, thereby requiring the company’s dissolution under the operating agreement and allowing the defendant to obtain liquidity he desired.

The Court held that, although the circumstances surrounding the vote were contrived insofar as the vote was pre-ordained, the deadlock nevertheless was genuine because there was a legitimate disagreement as to whether removing the plaintiff was in the best interests of the company. In so holding, the Court reasoned that the defendant’s desire for liquidity, while a motivation for the dissolution, was not the driving force behind the defendant’s decision to remove the plaintiff as manager; the well-documented deterioration in the parties’ business relationship was the primary motivation for the defendant’s decision. The Court thus held that the dissolution was valid and, for similar reasons, held that there was not a breach of fiduciary duty by the defendant when effecting the dissolution.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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