In a noteworthy and recent Court of Chancery decision, Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021), the Delaware Court of Chancery ruled upon a member’s request to invalidate dissolution of a Delaware limited liability company. The opinion is an important read as the Court considered whether the LLC deadlock–which provided the basis for dissolution–was genuine or simply “contrived” by one member to force the appearance of deadlock.
In this action, Plaintiff Mehra and Defendant Teller had equal say over the member and board decisions of the limited liability company at issue (“Company”), a consumer goods company. After several successful years, the Company suffered a series of setbacks that soured the parties’ relationship and left Teller strapped for cash.
The LLC agreement contained a deadlock provision which, according to the Court, “created a trapdoor with a hair trigger” (slip op. at 1), in that one member could propose a business divorce to the board, declare deadlock if the other disagreed, and exit the shared-control arrangement between the two parties.
Here, Teller held a meeting whereby he proposed a resolution to remove Mehra as CFO of a Company subsidiary. As the parties could not agree on this resolution, Teller declared the board deadlocked and dissolved the Company.
Mehra brought suit before the Delaware Court of Chancery to invalidate the dissolution in order to restore the shared-control arrangement among Mehra and Teller. The Court resolved the issue in Teller’s favor, finding that although Teller may have contrived the circumstances giving rise to the deadlock, Teller nonetheless proved that the parties had an irreconcilable disagreement over Mehra’s continuing management of the Company. As such, the Court found that the deadlock was genuine and sufficient to warrant dissolution.
The Court also denied Mehra’s assertion that dissolution should be rendered invalid due to Teller’s alleged breach of a “good faith” provision of the LLC Agreement. The Court disagreed, finding that Teller acted with the honest belief that his conduct was necessary for the Company.
This decision is notable in that while the Court found that Teller was the party responsible for creating the circumstances giving rise to deadlock, a genuine deadlock nonetheless existed, which warranted dissolution. Members of a Delaware limited liability company who have equal rights and say over the affairs of such LLC should carefully take this opinion into consideration in the event that one member seeks to dissolve an entity over deadlock.
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.