C.A. No. 3624-CC (Del. Ch. September 23, 2008)
The respondent, Seneca Investments, LLC (“Seneca”), moved for judgment on the pleadings in opposition to a petition for judicial dissolution. The petitioner and former Chief Executive Officer of Seneca, Michael P. Tierney, sought judicial dissolution of Seneca. Seneca is a limited liability company; however, its Operating Agreement specified that it was to be governed by the Delaware General Corporation Law (the “DGCL”), subject to certain exceptions. Seneca had both an operating agreement and a charter. Petitioner therefore asked the Court to order dissolution of Seneca under the Delaware Limited Liability Company Act (the “LLC Act”), 6 Del. C. § 18-802 and under the DGCL, 8 Del. C. § 226(a)(3). Petitioner argued that Seneca had “abandoned its business” and should be dissolved as a result. The Court noted that, for petitioner to prevail on the motion for judgment on the pleadings, the petition for dissolution must contain “enough facts to plausibly suggest” that petitioner is entitled to dissolution.
The Court first examined the petition under § 18-802 of the LLC Act, which states that a Court may dissolve an LLC “whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company.” The Court noted that there is minimal case law interpreting § 18-802, and that courts have looked to the corresponding provision of the Delaware Revised Uniform Limited Partnership by analogy. Under the limited partnership statute, the Court of Chancery has previously ordered judicial dissolution in situations “where there was a ‘deadlock’ that prevented the corporation from operating and where the defined purpose of the entity was fulfilled or impossible to carry out.” (Citations omitted).
Here, the Court found no voting deadlock in Seneca. Since there was no voting deadlock, the Court focused on a second potential basis for dissolution: whether it was impracticable for Seneca to fulfill its business purpose. To make this determination, the Court explained that it must look to the “purpose clause set forth in the governing agreements, in this case, the charter.” The Court further explained that the purpose under Seneca’s charter was “to engage in any lawful act or activity for which corporations may be organized under the [DGCL].” The Court then concluded that it is a “commonly encountered phenomenon” for a corporation to be “formed and maintained as a passive instrumentality.” Since Seneca’s inactivity did not frustrate the purpose of Seneca’s charter, the Court held that it was reasonably practicable for Seneca to conduct its business.
Nor did the Court find petitioner’s other arguments for dissolution compelling. Petitioner first argued that dissolution was proper because Seneca violated provisions of the Operating Agreement. The Court held, however, that even if Seneca was in violation of some provisions of the Operating Agreement, these violations were not sufficient grounds for it to order a judicial dissolution of the LLC.
Second, petitioner argued that a provision of the Operating Agreement required Seneca to liquidate assets and “prohibited any business activity by Seneca other than liquidating assets and distributing cash to shareholders.” Section 2.2 of the Operating Agreement requires that “[d]istributions of available cash for any Fiscal Year shall be made to the Stockholders in accordance with the number of Common Shares held by each.” The Court found that petitioner’s claim was unsupported by any facts and was based upon an unreasonable interpretation of the Operating Agreement.
Since petitioner did not allege a voting deadlock and was unable to allege sufficient facts to a support a claim that it was not reasonably practicable for Seneca to conduct its business practices in accordance with Operating Agreement, the Court held that there was no material fact in issue under the § 18-802 analysis that merited denying respondent’s motion for judgment on the pleadings.
Lastly, the Court examined the request for judicial dissolution under the DGCL. Under § 226(a)(3), the Chancery Court may appoint a custodian or receiver when “[t]he corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.” A corporation’s “business” in this context means the business of the corporation as articulated in the purpose clause of its charter. Seneca’s business purpose, as stated in its charter, was to engage in “any lawful action for which corporations may be organized” under the Delaware General Corporation Law. Here, Seneca was engaged in two business activities: (1) passively holding investments in other companies; and (2) pursuing counterclaims against the petitioner and several companies associated with him. Citing Giancarlo v. OG Corp., 1989 WL 72022 (Del. Ch.), the Court concluded that passively holding an investment is a valid business activity under § 226(a)(3). Further, although in its decision in In re Silver Leaf, L.L.C., 2005 WL 2045641 (Del. Ch.), the Court had concluded that pursuing claims was not enough to prevent dissolution of an LLC under § 18-802 where the LLC was deadlocked and where a receiver could be appointed to prosecute those claims, it here concluded that such pursuit by an LLC that was not deadlocked was indeed a business activity sufficient to prevent dissolution. Thus, Seneca’s business activities of holding investments and of pursuing claims defeated the petitioner’s motion to appoint a custodian or a receiver under § 226(a)(3) on the grounds that Seneca had not “abandoned its business.”
In conclusion, the Court granted Seneca’s motion for judgment on the pleadings under Rule 12(c) and dismissed the petition for dissolution.
The full opinion is available here.