Monday, March 5, 2018

Judicial Dissolution of the LLC: A Statutory Analysis

     The first Business Law Prof Blog conference was held in Knoxville back in September.  Learned a lot, and had a great time.  Looking forward to future ones!

     My contribution to the conference was an article on "Judicial Dissolution of the Limited Liability Company:  A Statutory Analysis," 19 Tennessee Journal of Business Law 81 (2017).  I took a look at the judicial dissolution statutes in all 50 states as well as the major model acts, and provided commentary on some of the more interesting differences.  The article is complete with two charts (not one, but TWO), and who doesn't love charts in a law review article?  If you are interested, please click on the link LLC Judicial Dissolution. I summarize the descriptive findings in the article below, but you'll have to take a look for the analysis/commentary:

     The most common judicial dissolution ground in the sample is when the court decides that it is not reasonably practicable to carry on the business in conformity with the LLC’s governing documents.  Fifty-four statutes include some version of this language.  Interestingly, this ground is articulated in several different ways.  Twenty-three of the fifty-four statutes allow for judicial dissolution if a court decides that “[i]t is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.”  Another sixteen statutes provide for judicial dissolution if a court decides that “[i]t is not reasonably practicable to carry on the business in conformity with the certificate of formation or the operating agreement.”  An additional twelve statutes allow a court to dissolve upon a finding that “it is not reasonably practicable to carry on the limited liability company’s activities and affairs in conformity with the limited liability company agreement.”  Three more states allow for dissolution when a court concludes that “it is not reasonably practicable to carry on the company’s activities and affairs.”  Finally, one state provides for dissolution when a court concludes that “it is not practicable to conduct the LLC’s business in conformance with the operating agreement and this Chapter.”

     The next most common judicial dissolution ground in the sample is the presence of unlawful, illegal, or fraudulent conduct by members, managers, or the LLC itself.  Twenty-nine statutes include some version of this language.  The most prevalent formulation is to provide one ground that focuses on the company’s activities (“the conduct of all or substantially all of the company’s activities is unlawful”) and another ground that focuses on the behavior of the managers or members (“the managers . . . or those members in control of the company . . . have acted, are acting, or will act in a manner that is illegal or fraudulent”). Some statutes, however, limit the focus exclusively to the conduct of the managers or members in control.

     Dissolution on the grounds of oppressive conduct by managers or members is included in twenty-four statutes in the sample. Most statutes articulate this ground by using the term “oppressive” or “unfairly prejudicial” action by the managers or members in control of the company.  A very small number of statutes speak of conduct that is an “abuse of authority,” and a few refer to dissolution when necessary to protect the “rights and interests” of the petitioning member.  I included all of these variations in this category.  

     Ten statutes provide for judicial dissolution when the economic purpose of the company cannot be accomplished.  Most statutes articulate this ground by providing that “the economic purpose of the [LLC] is likely to be unreasonably frustrated.”  One statute provides for dissolution when a court determines “that it is impossible for the company to carry on the purposes of the company,” while another is triggered when the “business of the limited liability company has been abandoned.”  I included all of these variations in this category.

     Other grounds for judicial dissolution include the following:  (1) member conduct that makes it not reasonably practicable to carry on the company’s business with that member (seven statutes); (2) failure to purchase the petitioner’s distributional interest when required (five statutes); (3) member or manager deadlock (five statutes); (4) waste or misapplication of assets (four statutes); (5) abuse of power by the LLC contrary to the public policy of the state (one statute); and (6) “other circumstances [that] render dissolution equitable” (one statute).

 

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