There are numerous examples of why deadlock-breaking mechanisms are critical in closely held businesses, particularly limited liability companies (LLCs). Perhaps a celebrity chef will spread the word more effectively than the many previous articles and CLE programs that have illuminated this common problem.
Celebrity chef Gordon Ramsay (Ramsay or GR) has found fame and fortune in the restaurant business through his many commercial successes and media exposure around the world. Yet even he was not immune from the misery of a failed business venture caused by a 50-50 LLC ownership and management structure, shockingly, with no deadlock-breaking mechanism built into the LLC Agreement.
The Delaware Court of Chancery decided the case, In Re: GR BURGR, LLC v. Rowen Seibel, Case No. 12825-VCS, on Aug. 25, 2017. This article provides a synopsis of the Memorandum Opinion of Vice Chancellor Joseph R. Slights III.
In December 2012, Ramsay partnered with Rowen Seibel (Seibel or RS) to form GR BURGR LLC (GRB), a Delaware LLC, to develop a first-class burger themed restaurant concept. Ramsay held his 50 percent membership interest through GRUS Licensing LP (GRUS), which was majority owned and controlled by Ramsay. Seibel owned and personally held the remaining 50 percent membership interest in GRB.
GRUS and GRB entered into a License Agreement for certain trademarks and other intellectual property (IP) owned by GRUS (GRUS IP License) that was integral to the planned operations of GRB, including the right to use Gordon Ramsay's name in association with BurGR restaurants.
The LLC Agreement provided that GRB was a manager-managed LLC, with two managers, each of whom were to be appointed by the respective two members. RS appointed himself as a manager, while GRUS appointed a third-party individual as its designated manager. The LLC Agreement explicitly provided that the managers had "full and exclusive right, power and authority to manage all of the business and affairs of the Company."
The LLC Agreement required a majority vote of the two managers (i.e., unanimity) for an action of the managers to be effective. If the two managers could not act unanimously, there was no LLC agreement provision addressing what was to happen. A classic formula for a deadlock.
The LLC Agreement failed to include any deadlock-breaking mechanism – also something that happens all too frequently, but which was surprising given the parties involved in this case.
The LLC Agreement included as one of the four triggers for dissolution the rather common recitation that GRB would be dissolved upon "the entry of a judicial decree for dissolution."
The first and only GRB restaurant was opened under the name BurGR restaurant (the association with Gordon Ramsay was prominently displayed) in the Planet Hollywood Resort & Casino in Las Vegas (Planet Hollywood), through a Development, Operation and License Agreement (Caesar's Agreement), with an affiliate of Caesar's Entertainment Corp. (Caesars).
As frequently happens when two people have equal control over a business, a deadlock arose between Ramsay and Seibel, which came to a head on April 18, 2016, when Seibel pled guilty to a felony violation of the Internal Revenue Code.
From the Chancery court record, it appears that the relationship between Ramsay and Seibel had gotten so bad that they were not on speaking terms by the time the felony conviction was entered against Seibel.
That felony conviction rendered Seibel an "Unsuitable Person" as defined in the Caesar's Agreement, as determined in the "sole and exclusive judgment" of Caesar's, a determination that was explicitly left to Caesar's under the terms of the Caesar's Agreement.
As a result of the felony conviction, shortly after Seibel was sentenced, Caesar's gave written notice to GRB, Ramsay and Seibel on Sept. 2, 2016, that it would terminate the Caesar's Agreement to operate the BurGR restaurant in Planet Hollywood, unless Seibel completely dissociated from GRB. Seibel contested that determination in a separate lawsuit filed in Nevada and refused to dissociate from GRB.
In the meantime, GRUS and its manager appointee could not resolve the inevitable dispute that developed with Seibel, since GRUS wanted Seibel to exit the venture so GRB could maintain its BurGR restaurant operations in Planet Hollywood. Seibel refused.
On Sept. 21, 2016, Caesar's terminated the Caesar's Agreement with GRB.
As a result of the termination letter from Caesar's, GRUS then sent its own termination letter to GRB on Sept. 22, 2016, terminating the GRUS License Agreement between GRUS and GRB for use of the GRUS IP, including the use of the Gordon Ramsay name in connection with BurGR restaurant operations.
On Oct. 13, 2016, GRUS filed an action in the Court of Chancery seeking judicial dissolution of GRB based on the management deadlock.
Seibel answered and counterclaimed on Nov. 23, 2016, and alleged in its answer that "GRUS, through its controller Ramsay, prevented GRB from engaging in any other business as part pf a concerted effort to oust Seibel from the Company and to self-interestedly secure the value of the Company and its assets for the sole benefit of Ramsay." See, Answer paragraph 24.
Seibel's counterclaims alleged misappropriation and unjust enrichment by GRUS, brought derivatively on behalf of GRB; breach of fiduciary duty by GRUS brought directly by RS, as well as derivatively on behalf of GRB; and also alleged, derivatively, that GRUS breached its License Agreement with GRB.
On Dec. 13, 2016, GRUS filed a Motion for Judgment on the Pleadings based on what it considered were undisputed facts. There were subsequent proceedings in both the Nevada litigation and the Chancery court proceedings, but the parties could not resolve their dispute.
The Court of Chancery Decision
On Aug. 25, 2017, the Court of Chancery, in a memorandum opinion by Vice Chancellor Slights, decided, as a matter of law, that it was no longer reasonably practicable for GRB to carry on its business in conformity with its operating agreement and, therefore, dissolution was appropriate under Delaware law. The Court granted the Motion for Judgment on the Pleadings by GRUS and ordered the dissolution of GRB.
Delaware's LLC Act, Section 18-802 provides "[on] application by or for a member or manager the Court of Chancery may decree dissolution of an LLC whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement."
In addressing the "not unreasonably practicable" standard, the Vice Chancellor noted that standard does not require a petitioner to show that the purpose of the LLC has been "completely" frustrated. Rather, "the standard is whether it is reasonably practicable for the company to continue to operate its business in conformity with its LLC Agreement". Citing Fisk Ventures LLC v. Segal, 2009 WL 73957 (Del. Chan. 2009), aff'd 984 A.2d 124 (Del. 2009).
The Vice Chancellor held that the analysis is based on the relevant facts and circumstances, with no "blueprint" for determining what is reasonably practicable. However the court summarized "several convincing factual circumstances that have pervaded the case law":
- the members vote is deadlocked at the Board level
- the operating agreement gives no means of navigating around the deadlock
- due to the financial condition of the company, there is effectively no business to operate
None of the factors were individually dispositive, nor must they all exist to find that it is not reasonably practicable to carry on business in accordance with the operating agreement.
The court conceded that judicial dissolution is an "extreme remedy" of "last resort", but it was clear that the court had statutory and common law authority to order dissolution when the facts and circumstances established a basis for the court to conclude that the "not reasonably practicable" standard had been satisfied in the court's judgment.
The court relied heavily on the facts that "… he [Seibel] and Ramsay no longer speak and no longer make decisions for GRB. This dysfunction and voting deadlock has left the Company in a petrified state with no means in the LLC Agreement to break free."
The court went on to address the meaning of "deadlock" by stating, "In the context of judicial dissolution, deadlock refers to the inability to make decisions and take action, such as when an LLC agreement requires an unattainable voting threshold."
The court also addressed the circumstances where judicial dissolution was appropriate, even though the business was continuing to operate despite the deadlock. Citing Haley v. Talcott, 864 A.2d 86 (Del. Ch. 2004), Phillips v. Hove, 2011 WL 4404034 (Del. Ch., 2011) and Vila v. BVWebTies LLC, 2010 WL 3866098 (Del. Ch. 2010).
The court also took notice of previous court decisions involving LLCs and partnerships, which analogized to the Delaware General Corporation Code (8 Del. C. Section 273) that addresses judicial dissolution of joint venture corporations with two 50 percent stockholders and sets forth three prerequisites for a judicial order of dissolution of a joint venture corporation: 1) there are two equal 50 percent stockholders, 2) those two stockholders must be engaged in a joint venture, and 3) they must be unable to agree upon whether to discontinue the business or how to dispose of the corporation's assets.
The Court looked at the following undisputed facts as dispositive in finding that the deadlock at GRB met the "not reasonably practicable to carry on its business in conformity with its LLC Agreement" standard for judicial dissolution, for the following reasons:
- The relationship between the two 50/50 members (GRB and RS) was, at best, acrimonious, as evidenced by the counterclaims pled by RS, the Nevada lawsuit and litigation between the parties in New York stemming back to 2014.
- The felony conviction of RS in 2016, along with the facts admitted in the pleadings, show clearly that whatever deadlock may have arisen prior to the conviction, the deadlock "solidified into igneous rock thereafter".
- Caesar's written demand requiring RS' dissociation from GRB, which RS refused but with which GRUS wanted to find a way to comply to keep the Caesar's Agreement in place, evidenced the inability of the two members to agree or find a compromise to keep the company's only restaurant business operating at Caesar's.
- The Termination of the Caesar's Agreement that foreclosed the possibility of continued operations of the sole BurGR restaurant at Caesar's was caused by Seibel's felony conviction, not by actions of GRUS or GR.
As the court stated: "It is difficult to imagine how GRB could be any more dysfunctional or deadlocked".
The court contrasted these facts with the facts in Lola Cars Int'l Ltd. v. Krohn Racing LLC, 2010 WL 3314484 (Del. Ch. 2010), where the Chancery court found that judicial dissolution was not warranted "where the petitioner's frustration amounts to little more than disappointment with how [the company] is structured and managed" because "unfortunately for [the petitioner] it agreed to this arrangement" and "emphasizing that a party to a limited liability company agreement may not seek judicial dissolution simply as a means of freeing itself from what it considers a bad deal."
Vice Chancellor Slights concluded: "GRUS finds itself in a lifeless joint venture that does not resemble the one it bargained for. The undisputed facts reveal that the parties will remain deadlocked without a mechanism in the LLC agreement to break through. It is therefore "not reasonably practicable" for GRUS and Seibel to carry on GRB in conformity with the limited liability company agreement."
Finally, the court addressed Seibel's claims that even if GRUS satisfied the "not reasonably practicable" standard, equitable principles should override to deny the requested judicial dissolution because GRUS was seeking to usurp the company opportunity and disenfranchise Seibel as a 50 percent owner for Ramsay's personal benefit. Essentially, Seibel was arguing that the request for judicial dissolution was brought in bad faith, or because of bad faith conduct, and that equity should not reward bad faith conduct.
Seibel argued that Ramsay colluded with Caesar's to terminate the Caesar's Agreement and to deprive GRB of two of its three principal assets: 1) the Caesar's Agreement to operate at Planet Hollywood and 2) the License Agreement from GRUS under which the BurGR restaurant was marketed under the Gordon Ramsay name. Seibel pointed out that Ramsay has continued to operate the BurGR restaurant at Planet Hollywood during the pendency of the lawsuit and that the BurGR restaurant was profitable notwithstanding the deadlock.
The court examined the cases which addressed equitable principles as trumping judicial dissolution, but it concluded that those cases were distinguishable from the facts of the instant case, most notably because there had been no evidence to support a desire by GRUS to dissolve GRB or to walk away from the joint venture with Seibel prior to Seibel's felony conviction and Caesar's termination of its Agreement with GRB. That felony conviction, and the problems which flowed from it, were of Seibel's own doing. As the court noted: "The deadlock here is temporally related to a series of events caused by Seibel, that have rendered GRB no longer able to function."
The court also noted that Seibel failed to point out any future business opportunity that rightfully belonged to GRB that GRUS or Ramsay was seeking to exploit for themselves, nor any specific harm that would arise from the dissolution of GRB since it could no longer operate its sole restaurant in Planet Hollywood as a result of the termination of the Caesar's Agreement.
The court concluded that, based on the facts, it would be the "antithesis of equitable" to lock Ramsay into a failed joint venture and thereby preclude Ramsay from ever engaging in a restaurant business that bears his name or one that resembles the burger business operated by GRB.
In closing, it should be noted that the former BurGR restaurant at Planet Hollywood Resort & Casino in Las Vegas was rebranded in April 2017 as Gordon Ramsay Burger and continues to operate there under the new name as of the writing of this article.