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Vila v. BVWebTies LLC, C.A. No. 4308-VCS (Del. Ch. Oct. 1, 2010), read opinion here.
This opinion adds needed depth to the case law on Section 18-802 of the Delaware LLC Act which allows a member of an LLC to seek dissolution when it is not "reasonably practicable" to continue to operate an LLC in conformity with its LLC Agreement. In this case, there were only two managers, and those two managers needed to agree on any decisions of the LLC. The Court concluded that when the consent of equal owners is required for any company action and they are deadlocked as to the future direction or management of the enterprise, and the LLC Agreement provides no mechanism by which to break the deadlock, "it is not reasonably practicable for the LLC to operate consistently with its Operating Agreement, and a judicial dissolution will be ordered."
Background and Legal Analysis
This LLC involved the home improvement celebrity, Bob Vila, who formed a website that offered home improvement advice as well as product suggestions and related online assistance. He entered into the online venture with a businessman named George Hill in February of 2000. Initially, the major investor and the major advertiser on the site was Sears Roebuck. Although Vila and Hill each owned 49%, a trust owned the remaining 2%. Importantly, Vila and Hill were the only two managers and their affirmative vote was required in order for any decision regarding the course of the business.
The intellectual property connected with Vila was the subject of a License Agreement which could be terminated at any time for any reason or for no reason.
In the year 2007, the entity that owned the website ("WebTies") suffered a dual setback at a time when the overall American economy was entering a deep recession and the housing bubble was about to burst. At that time, the syndicated television show that starred Vila, which was a primary source of video clips on the website and a source of broad exposure that sparked the interest of advertisers, was cancelled. During the same year, the largest advertiser on the site, Sears Roebuck, also ceased its advertising. At that time, Vila decided to focus more on WebTies. However, Vila and Hill could not agree on the future direction of the company.
Hill wanted to maintain a small and lean operation with only a handful of employees operating out of a small office in Boston. By contrast, Vila wanted to move the office to New York City and hire a Harvard MBA to put the company on a more aggressive growth plan.
The dispute came to a head in early 2009 when Vila filed suit in Delaware seeking dissolution pursuant to 6 Del. C. Section 18-802.
Pursuant to Section 18-802, a judicial decree of dissolution of a Delaware LLC is not an entitlement, but is within the discretion of the Court to grant, when, by a preponderance of the evidence: (i) a member or a manager; (ii) demonstrates that it is "not reasonably practicable to carry on the business in conformity with a Limited Liability Company Agreement."
At the trial of this case, Vila made two arguments why it was "not reasonably practicable" to carry on the WebTies business in conformity with the LLC Agreement. First, the argument was that WebTies was formed for the purpose of developing and operating a website called BobVila.com and that based on Vila's decision to terminate the license agreement, it was impossible for WebTies to function in accordance with its contractually stated objective. The second argument was based on the fact that the LLC Agreement required the consent of both managers for any decisions, but that Hill had unilaterally given himself decisionmaking authority over a strategy that Vila strongly opposed.
Hill responded, unpersuasively, that the business should be allowed to proceed because it is earning a modest profit and so, he argued, it is reasonably practicable to continue its existence. The Court also framed the argument of Hill, somewhat in disbelief, that if one manager of an LLC required to be governed by the mutual agreement of all the managers, is unilaterally directing the business and no disaster has occurred, the business can proceed in accordance with the LLC Agreement despite the fact that the manager has claimed for himself authority that is required to be exercised jointly under the agreement.
The Court cited at footnotes 48 and 49 many other cases that have used Section 273 of the DGCL to support dissolution of a joint venture when two coequal shareholders face a deadlock, on the theory that a deadlocked management board is a quintessential example of a situation justifying a judicial dissolution.
Although the number of cases interpreting the phrase "reasonably practicable" in this context is increasing, because of the comparative paucity of such cases when compared with similar provisions under the DGCL, this opinion has substantial importance for its application and amplification of that statutory language. Analogizing to Section 273 of the DGLC, the Court in this opinion reasoned that:
"When an LLC Agreement requires that there be agreement between two managers for business decisions to be made, [when] those two managers are deadlocked over serious issues, and the LLC Agreement provides no alternative basis for resolving the deadlock, it is not 'reasonably practicable' to continue to carry on the business 'in conformity with its Limited Liability Company Agreement.'" (emphasis added.) See footnote 51.
The Court found after trial that it was indisputable that Vila and Hill were deadlocked over serious managerial issues and the uncontradicted evidence established that Vila and Hill were unable to agree on the strategic vision for the current operation of WebTies, the entity that owned their online business.
In addition, the opinion observed that: "They have disagreed on several major initiatives, the strategic direction and capitalization of WebTies, and important operational decisions, including failing to reach an agreement on renewing the company's office lease, with the result that the company operates out of cyberspace, ad hoc office suites, and coffee shops. Both Vila and Hill agreed that they have not communicated directly with each other for nearly two years since this lawsuit was filed in early 2009." Moreover, the Court concluded that "it is silly to think that WebTies can continue to operate BobVila.com."
The Court rejected the argument of Hill that he should be able to continue the business because he is making a profit. Also, the Court emphasized that Vila "did not sign up for such a business strategy and, in any event, does not support it." The Court added that Hill's defense of this case "suggests that Hill had a playground sense of his rights. According to Hill, he called 'LLC' and was entitled, in the face of drastic changes in the business circumstances facing WebTies, to continue WebTies on an inertial path even when his co-manager Vila adamantly disagreed."
The Court cited cases in footnote 58 that rejected the notion that one co-equal fiduciary may ignore the entity's governing agreement and declare himself the sole "decider." See, e.g., Haley v. Talcott, 864 A.2d at 91-92, which granted dissolution when one co-owner of a restaurant forbade the other from physically entering the restaurant premises after changing the locks.
One might summarize the reasoning of the Court (as supported by the cases cited in the footnotes) for the suggestion that in this situation involving co-equal owners or co-equal managers, one of those co-equal managers cannot simply lock out the other or operate the business without the consent of the other, but if such an attempt is made, it would provide a persuasive basis for dissolution.By contrast, or by comparison, the Court cited to cases at footnote 62 which involved a deadlock that did not necessarily justify a dissolution if the LLC Agreement provided a means to resolve the impasse in an equitable manner.
Although Hill presented counterclaims, the Court regarded them as "thinly pled" and observed that Hill "did little at trial to try to prove [them]". The Court also described some of the counterclaim arguments as coming "with ill grace." Nonetheless, the Court carefully analyzed before rejecting arguments in the counterclaims such as acquiescence, waiver, and estoppel. See, e.g., footnotes 68, 72 and 73.
Importantly, the Court rejected fiduciary duty claims that were based on conduct specifically allowed by the LLC Agreement. Citing cases at footnote 88, the Court emphasized that fiduciary duty claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous because it is a well settled principle that where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim.
The Court appointed a liquidating trustee with the broadest possible fiduciary powers to wrap up the affairs of the company in a responsible manner that preserves value for members while honoring the legal obligations of the company that it owes to others. Although Hill refused to tender a name to serve as a liquidating trustee, Vila tendered the name of Martin T. Mand, a business executive and arbitrator who has successfully handled this role before when appointed by the Court. See footnote 91.
The Court appointed a prominent Delaware lawyer as the attorney for the liquidating trustee and tasked them with preparing an initial proposal for an order of appointment that gives Mand "the broadest authority consistent with the Delaware Limited Liability Company Act to decide how to dissolve the company and to wrap up its affairs." The Court also added that Mand "should be empowered broadly to act under a business judgment rule standard if the [LLC] Act so permits." (Referring to Section 18-406 of the LLC Act which provides that a liquidating trustee shall be exculpated from liability for a decision involving the disposition of the LLC's assets made in good faith reliance on the LLC's records, reports and information.)
The Court acknowledged the lengthy proceedings that have transpired thus far in this case, and emphasized that "pleas by either Hill or Vila for a lengthy winding-up or auction process will not be indulged." Moreover, because Vila had the right to terminate the Licensing Agreement for any reason or no reason, the Court made it clear that it had little patience for any arguments that the business still owned the intellectual property.
If I can obtain a copy of the implementing order for the appointment of the liquidating trustee, I will attempt to post it as a supplement to this brief case summary.
Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Fox Rothschild LLP.