The law governing California limited liability companies evolves in real time | Lessons from the courtroom battlefront

Dissolving an LLC when its Purpose Fails

Most LLC Operating Agreements contain a provision describing the “purpose” of the business.

These “purpose statements” can be extremely broad and open-ended, parroting the boilerplate language required to be present in the Articles of Organization — i.e., “to engage in any lawful act or activity for which a limited liability company may be organized….”

But more often, “purpose” provisions are more narrowly tailored and specific, which can be useful in establishing the scope of fiduciary duties owed by a manager, particularly regarding competing activities or “side” ventures.

“Purpose” and its impact on dissolution

The Operating Agreement’s description of the LLC’s purpose can also play an important role in dissolution.

A prior post on The LLC Jungle — “Retaliatory Amendment” of an LLC Operating Agreement — covered a New York case where a disgruntled LLC member (and former managing member) sued for dissolution.  In that case, the member claimed that the LLC could no longer fulfill its intended purpose and had to be dissolved because the other members had amended the Operating Agreement in a “retaliatory” fashion, removing him as the managing member and then requiring additional capital contributions they knew he could not fund.

The court rejected his claim, noting that the Operating Agreement’s “purpose” provision was very broad — essentially, owning and operating property, and “engaging in any and all activities necessary or incidental to the foregoing.”  The claim’s allegations that the other members had a “vendetta” against him did not show that the LLC had abandoned its purpose, so dissolution would be improper.

On the other end of the spectrum, in a recent opinion from Delaware — Decco U.S. Post-Harvest, Inc. v. MirTech, Inc. — the failure of an LLC’s purpose was held to justify dissolution.

Facts: Parties form an LLC with the purpose of commercializing products based on a specific gas used in the agriculture industry.  The purpose fails.

MirTech and Decco U.S. Post-Harvest, Inc. formed an LLC (Essentiv LLC) to operate their joint venture, which was based on commercializing products using a gas known as 1-MCP, used to delay the ripening of fruit and other produce.

MirTech claimed that it owned the intellectual property rights to 1-MCP, and as part of the LLC Operating Agreement, MirTech agreed to grant the LLC exclusive licenses to those intellectual property rights.

In the Operating Agreement, MirTech and Decco agreed that the LLC’s purpose was “to conduct and coordinate all activities related to chemistry and biology R&D, collaboration with universities and government researchers, regulatory support and registration filings, manufacturing, supply chain activities, strategic marketing and marketing communications related to 1-MCP Products….”

In other words, the LLC was “all in” on the 1-MCP gas.

A serious problem soon surfaced: a separate company (AgroFresh, Inc.) sued MirTech, claiming that AgroFresh — and not MirTech — owned the intellectual property rights to 1-MCP.  In the settlement agreement and consent judgment for that case, MirTech agreed that AgroFresh owned the intellectual property rights to 1-MCP.

Upon learning those developments, Decco was understandably disappointed.  It sued to dissolve the LLC that it had formed with MirTech.

Court’s Opinion: Dissolution justified by failure of LLC’s purpose

In a court trial, the Delaware Court of Chancery held that dissolution was justified by the failure of the LLC’s purpose.

The court started with the language of section 18-1802 of the Delaware LLC Act, allowing dissolution upon petition “whenever it is not reasonably practicable to carry on the business in conformity with” the LLC’s operating agreement.

The court also noted that a company’s self-stated purpose could be a key part of the equation:  “A party may obtain dissolution by showing that the defined purpose of the entity has become impossible to fulfill. … The purpose clause is of primary importance….”

The court held that because MirTech did not own the intellectual property rights to 1-MCP, the LLC “no longer has any 1-MCP Business.”  The LLC’s purpose failed, and therefore dissolution was warranted.

Lesson

While the MirTech opinion came from a Delaware court, it is worth noting due to the overlap with California law.

Under California’s Revised Uniform Limited Liability Company Act, a manager or member of an LLC can sue for dissolution when (among other grounds) “It is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.”  (Corp. Code section 17707.03(b)(1).)

If the LLC’s Operating Agreement states the LLC’s purpose with precision, and that purpose becomes impossible to fulfill, a court will likely order dissolution.

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