"In Terrorem" Dissolution Waivers

     posted by Gary Rosin

Peter A. Mahler (New York Business Divorce blog) asks WWDD (What Would Delaware Do) With an In Terrorem LLC Dissolution Waiver Clause?  Mahler discusses a recent New York trial court ruling, In re Young man, in which the court refused to enforce this what he called an "in terrorem" dissolution waiver:

Neither member may seek judicial dissolution of this Company, and any withdrawal shall not be deemed an act causing dissolution of the Company.  Any member who seeks judicial dissolution of the Company will be deemed to have withdrawn as a member of the Company, thereby forfeiting all rights, interests and entitlements to the Company and its assets.

Now that's draconian. No right to judicial dissolution, and if you try, you forfeit everything.

Mahler then asks "What Would Delaware Do", especially after the Chancery Court opinion in R & R Capital LLC (see earlier discussion here and here)?  Assuming that a Delaware court would be reluctant to depart from the "mere contractual entity" rhetoric of recent Delaware decisions, the only hope for a would-be plaintiff would be to challenge the forfeiture.  It's one thing to deem a member to have withdrawn, but forfeiting the LLC interest is an entirely different matter.