Breaking Up May Not be Hard to Do: Dissolving a California LLC
Limited liability companies are popular in California for a variety of reasons, including their relative ease of formation and management, and the protections from liability and tax advantages they offer. But what if you and the other member(s) of your LLC have a serious dispute or disagreement and, despite your best efforts, the dispute cannot be resolved? Are you stuck forever? The answer most likely is no—and this may be true even if the LLC’s operating agreement contains an anti-dissolution provision.
California law expressly provides that a manager or any member (or members) of an LLC may file an action in court for a judgment decreeing the dissolution of the company whenever any of the following can be shown:
“(1) It is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.
(2) Dissolution is reasonably necessary for the protection of the rights or interests of the complaining members.
(3) The company’s business has been abandoned.
(4) Management is deadlocked or subject to internal dissension.
(5) Those in control of the company have been guilty of, or have knowingly countenanced persistent and pervasive fraud, mismanagement, or abuse of authority.” (Corporations Code Section 17707.03.)
Once a suit for dissolution has been filed, and one or more of the above conditions is met, the other members may avoid the dissolution by purchasing for cash the membership interests owned by the members initiating the proceeding at their fair market value. If the parties are unable to agree on the fair market value of the membership interests, the court, upon application of the purchasing parties and posting of a bond, is required to stay the dissolution proceeding and then ascertain the fair market value of the membership interests by appraisal in the manner provided by statute. In the typical case, the court will appoint three disinterested appraisers.
But what if the LLC’s operating agreement (or some other document signed by the parties) explicitly or impliedly bars an action in court to dissolve the LLC? The California Legislature anticipated and provided for this in Corporations Code Section 17707.03, and in two specific ways.
First, the statute provides that “no member who sues for dissolution on the grounds provided in paragraphs (3), (4) or (5) [see this blog, above] . . . shall be liable for damages for breach of contract in bringing that action.” This may effectively nullify an anti-dissolution provision where one or more of the conditions set forth in paragraphs (3), (4) or (5), above, can be shown.
Second, the statute provides that, except in the situations described in paragraphs (3), (4) and (5), above, any damages resulting from a breach of an anti-dissolution provision “may be deducted from the amount payable to the moving party or parties” for their membership interests. But the party or parties seeking such damages will have to prove that such damages have in fact occurred, which, in most cases, will not be an easy task
There are some further nuances to this area of the law and, accordingly, there is absolutely no substitute for a consultation with an experienced and knowledgeable business litigator. If you are seeking or opposing the dissolution of an LLC, contact Adair Law Corporation for an evaluation of your case.
By: Lance A. Adair
Founder and Principal Attorney