Source: https://www.nybusinessdivorce.com/2015/05/articles/llcs/delaware-chancery-court-endorses-equitable-dissolution-of-llc/
Timestamp: 2019-04-22 01:59:22+00:00

Document:
strongly disfavoring judicial intervention based on open-ended notions of fairness (the main exception being when managers take on fiduciary duties by agreement or by default under the statute).
Stated simply, in Delaware certainty trumps indeterminacy.
Well, not always, as seen in a first-impression ruling last week by Vice Chancellor J. Travis Laster in In re Carlisle Etcetera LLC, C.A. No. 10280-VCL (read here), in which the court held that the assignee of an LLC membership interest, who as a non-member and non-manager lacked standing to seek involuntary dissolution under Section 18-802 of the Delaware LLC Act, nonetheless had standing to seek equitable dissolution under the Chancery Court’s common-law authority as a court of equity.
The case involves the Tom James Company (“TJC”), known throughout the U.S. and overseas as a manufacturer and retailer of custom clothing with an unusual business model in which tailors come directly to customers’ homes or offices. In 2012, TJC and a Hong Kong-based premium apparel supplier known as the Royal Spirit Group (“Royal”) formed a Delaware LLC known as Carlisle Etcetera (“Carlisle”) as a joint venture in which Royal owned its 50% interest through its affiliate, Well Union Capital Ltd. (“WU Parent”).
At inception TJC and WU Parent executed a simple form of operating agreement in which they committed to work promptly on a more detailed operating agreement to replace the original one, but never did so. The simple agreement, which created an evenly-divided, four-person Board as sole manager, was silent on the assignment of membership interests.
Serious disagreements and deadlock between the two owners arose within a year. The Board deadlock effectively gave company control to TJC whose CFO served as Carlisle’s CEO. In early 2014, TJC told Royal that it no longer wished to continue the joint venture. Subsequent buy-out negotiations failed.
In October 2014, WU Sub filed a petition seeking judicial dissolution of Carlisle under Delaware LLC Act § 18-802 based on deadlock at the member and manager levels. TJC moved to dismiss for lack of standing, contending that under the applicable default rules in § 18-702 of the LLC Act, (a) WU Parent was no longer a member of Carlisle upon the assignment of its membership interest to WU Sub, and (b) WU Sub as assignee had no membership interest because TJC never formally consented to its admission as a member. WU Sub countered that it was a de facto member by consent of the members as “reflected in the records” of the LLC, i.e., the tax returns and draft agreements, under § 18-301(b)(1) of the LLC Act.
Vice Chancellor Laster agreed with TJC’s position, holding that notwithstanding TJC’s treatment of WU Sub as a member, the absence of TJC’s formal consent to WU Sub’s admission as member as required by the Delaware LLC Act deprived it of standing to seek judicial dissolution under § 18-802, which confers the right to petition on members and managers, not assignees.
I cannot accept the contention that because the nascent practice of entity law as it existed at the time of the colonies’ separation had not yet envisioned LLCs, they fall outside the domain of equity. Decisions addressing the dissolution of LLCs have recognized the continuing role of equity.
To my mind, when a sovereign makes available an entity with attributes [such as limited liability] that contracting parties cannot grant themselves by agreement, the entity is not purely contractual. Because the entity has taken advantage of benefits that the sovereign has provided, the sovereign retains an interest in that entity. That interest in turn calls for preserving the ability of the sovereign’s courts to oversee and, if necessary, dissolve the entity. Put more directly, an LLC agreement is not an exclusively private contract among its members precisely because the LLC has powers that only the State of Delaware can confer.
operating contrary to the governance structure set forth in its constitutive agreement. [¶] When considering whether holders of equity in other entities can pursue equitable causes of action, despite their lack of formal ownership status, this court has relied on the substance of the relationship and permitted the suits to proceed. . . . Consequently, I believe that WU Sub has standing in equity, as an assignee, to seek dissolution of the Company under the facts alleged in the petition.
Vice Chancellor Laster issued his Carlisle opinion on April 30, 2015. Two business days later, on May 1st, he issued an Order granting WU Sub’s motion for summary judgment on its petition to dissolve the LLC (read here). The Order applies the standard for dissolution developed under Section 18-802 and cites deadlock, the parties’ acknowledgement of the need to separate, and the lack of an exit mechanism as warranting dissolution and the appointment of a custodian.
I suppose you could analogize Carlisle‘s recognition of equitable LLC dissolution to New York’s recognition of common-law dissolution for closely held corporations, which generally comes into play when oppressed minority shareholders lack the minimum 20% stock interest required by the dissolution statute, BCL § 1104-a. Standing under LLC Law § 702, New York’s statute authorizing judicial dissolution of LLCs, is even narrower than Delaware’s statute, limiting the right to petition to members, i.e., excluding both managers and assignees. I know of no New York case addressing a non-member’s equitable standing to seek common-law dissolution of an LLC.
Hat tip to Kurt Heyman of Proctor Heyman Enerio LLP for alerting me to the Carlisle case in which Kurt represents the petitioner.

References: § 18
 § 18
 § 18
 § 18
 § 1104
 § 702