Judicial dissolution under 6 Del. C. § 18-802, fair value buyouts, member withdrawal rights, winding up procedures, and alternatives to dissolution
When an LLC becomes dysfunctional or members can no longer work together, Delaware law provides judicial dissolution as a remedy of last resort. Understanding your dissolution and buyout rights requires analyzing both statutory provisions and operating agreement terms.
| Dissolution | Buyout |
|---|---|
| LLC ceases operations and liquidates assets | LLC continues operating under remaining members |
| All members receive liquidation proceeds based on capital accounts | Exiting member receives fair value for their interest |
| Business relationships severed for all members | Exiting member leaves, others continue |
| May destroy going-concern value | Preserves going-concern value |
| Nuclear option - forces complete liquidation | Surgical option - removes problematic member or provides exit |
"On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement."
By default, members have right to withdraw and receive fair value of their interest. However, operating agreements typically eliminate or heavily restrict withdrawal rights. Always check your operating agreement.
Operating Agreement Controls: Most Delaware LLC operating agreements eliminate voluntary withdrawal rights and may restrict dissolution rights. Some require arbitration of dissolution disputes. Review your operating agreement's dissolution and exit provisions before proceeding.
Before sending a dissolution demand letter, consider:
I personally analyze your operating agreement, evaluate grounds for dissolution, and draft strategic demand letters to facilitate exit or buyout.
Email owner@terms.lawDelaware's judicial dissolution statute provides a safety valve when LLC members reach irreconcilable conflict. The standard is stringent: "not reasonably practicable to carry on the business in conformity with the operating agreement."
Delaware courts interpret this standard narrowly. You must show more than:
You must prove the LLC cannot function according to its operating agreement.
Landmark case establishing "not reasonably practicable" standard. Court held that 50/50 deadlock preventing major business decisions (hiring, capital expenditures) made dissolution appropriate. Members had "irreconcilable differences" preventing LLC from operating according to its purpose.
Key quote: "The question is whether the LLC, as governed by its operating agreement, can continue to function as intended... If disagreements are so severe and persistent that the LLC cannot operate according to its governing documents, dissolution may be warranted."
Example: Two 50% members fundamentally disagree on critical decisions and operating agreement requires majority or unanimous consent. LLC is paralyzed - cannot hire employees, sign contracts, make capital expenditures.
"The LLC is owned 50/50 by [Member A] and myself. The Operating Agreement requires unanimous consent for [list critical decisions]. We have reached irreconcilable deadlock on the following matters essential to LLC operations: (1) hiring a general manager (I voted to hire Candidate X, [Member A] voted for Candidate Y), (2) whether to expand into [new market] ($500K capital investment), and (3) whether to renew the lease for our primary facility. As a result of this deadlock, the LLC has been unable to make any major business decisions for [X] months. Critical contracts have lapsed, key employees have left, and business opportunities have been lost. It is not reasonably practicable to carry on the LLC's business in conformity with the Operating Agreement's unanimous consent requirement."
Example: Manager engages in systematic self-dealing, misappropriation, or gross negligence. Operating agreement makes manager irremovable except for cause, but manager denies wrongdoing. LLC cannot function with corrupt manager but cannot remove them.
Example: LLC formed to develop specific real estate project. Project becomes impossible (zoning denied, key partner withdraws, financing falls through). LLC's sole purpose can no longer be achieved.
Court granted dissolution where LLC's business model (managing hedge fund) became impossible after client withdrew all capital. LLC's purpose could no longer be achieved, making continued operation impracticable.
Example: Majority members systematically exclude minority from information, deny distributions while paying themselves excessive compensation, dilute minority's interest, and refuse to honor operating agreement provisions. LLC cannot operate according to agreement when controlling members disregard it.
Example: LLC is insolvent, has no prospect of profitability, and members refuse to contribute additional capital. Continued operation only increases liabilities and depletes remaining assets.
Mere Dissatisfaction Insufficient: Delaware courts reject dissolution petitions based on member unhappiness, desire to exit, or belief that LLC could be better managed. The LLC must be actually dysfunctional, not just unpleasant.
Courts have denied dissolution in these scenarios:
If Court grants dissolution petition, it has broad equitable powers:
Delaware law distinguishes between voluntary withdrawal rights and court-ordered buyouts in dissolution proceedings. Most operating agreements eliminate voluntary withdrawal rights entirely.
By default, a member may withdraw from an LLC at the time or upon the happening of events specified in the operating agreement, and receive "the fair value of the member's limited liability company interest."
Critical Caveat: "A limited liability company agreement may provide that a member does not have the right to withdraw..."
Most Operating Agreements Eliminate Withdrawal Rights: Nearly all Delaware LLC operating agreements contain provisions like: "No Member shall have the right to withdraw from the LLC or to receive any distribution upon withdrawal." Read your operating agreement's withdrawal provisions carefully before asserting withdrawal rights.
If your operating agreement permits withdrawal (rare), you have the right to:
Even if operating agreement eliminates voluntary withdrawal, Court of Chancery can order buyout as alternative to dissolution:
Court noted its equitable power to fashion buyout remedy as alternative to dissolution when dissolution is warranted but would be economically wasteful. Court can order non-petitioning members to purchase petitioning member's interest at fair value.
Many operating agreements include buyout mechanisms triggered by specific events:
"Any Member may deliver notice to another Member offering to purchase that Member's entire interest for a specified price. The recipient Member must either: (a) sell their entire interest for the offered price within 30 days, or (b) purchase the offering Member's entire interest for the same price."
Effect: Forces fair pricing - if you lowball the offer, other member will buy you out at that price instead.
"If Members deadlock on a material decision for 60+ days, either Member may initiate buyout by obtaining independent appraisal of fair value. Non-initiating Member may either: (a) purchase initiating Member's interest for appraised fair value, or (b) sell their interest to initiating Member for appraised fair value."
Member wishing to sell must first offer to other members at same price offered by third party. Doesn't provide exit mechanism unless outside buyer exists.
Strategic approach to buyout demand:
"Rather than pursue costly dissolution litigation that would destroy the LLC's going-concern value, I propose that you purchase my 40% membership interest for $800,000, representing fair value based on: (1) LLC's $2.5 million enterprise value (4x EBITDA of $625,000), (2) my 40% pro-rata share = $1,000,000, less (3) 20% marketability discount = $800,000. This is a reasonable offer supported by the attached business valuation prepared by [valuation firm]. Payment terms: $240,000 down payment, remainder of $560,000 paid in 36 monthly installments of $15,556 with 6% interest. If you do not accept this offer within 30 days, I will file a petition for judicial dissolution in Delaware Court of Chancery pursuant to Section 18-802."
"Fair value" is the amount a willing buyer would pay a willing seller for the membership interest, with both having reasonable knowledge of relevant facts and neither under compulsion to act.
| Fair Value (Default for Buyouts) | Fair Market Value (If Agreement Specifies) |
|---|---|
| Pro-rata share of enterprise value | Price a third-party buyer would pay |
| Typically no minority discount | Includes minority discount for non-controlling interests |
| Typically no marketability discount | Includes marketability discount for illiquid interests |
| Values interest as going concern | Reflects actual market conditions and barriers to sale |
Operating Agreement May Specify Valuation Method: Many agreements define how fair value is calculated, including whether discounts apply, which valuation method to use, and whether parties must hire joint appraiser or each hire their own. Check your agreement before proceeding.
Projects LLC's future cash flows and discounts to present value using appropriate discount rate.
LLC projected to generate:
Discount rate: 15% (reflecting risk)
Present value calculation: $400K/(1.15)^1 + $450K/(1.15)^2 + $500K/(1.15)^3 + [$550K/0.15]/(1.15)^3 = ~$2.8 million enterprise value
Your 30% interest: $2.8M × 30% = $840,000
Values LLC based on multiples of revenue, EBITDA, or earnings that comparable companies trade at.
LLC financial metrics:
Comparable company analysis: Similar businesses in your industry sell for 3-5x EBITDA
Enterprise value: $1M EBITDA × 4x multiple = $4 million
Your 25% interest: $4M × 25% = $1 million
Values LLC based on fair market value of assets minus liabilities. Used when LLC holds primarily tangible assets (real estate, equipment).
LLC assets:
Liabilities: $1.2 million (mortgage + payables)
Net asset value: $3.7M - $1.2M = $2.5 million
Your 40% interest: $2.5M × 40% = $1 million
Values LLC based on capital account balances. Typically understates fair value because it doesn't reflect going-concern value, goodwill, or appreciated assets.
Rationale: Minority interest lacks control over business decisions, distributions, sale of company.
Typical range: 20-40% discount from pro-rata value
Delaware approach: Courts typically do NOT apply minority discount in fair value determinations for involuntary buyouts or dissolution. Minority member shouldn't be penalized for lack of control when majority's misconduct forced the exit.
Rationale: LLC interests are illiquid - no public market, transfer restrictions in operating agreement.
Typical range: 25-45% discount
Delaware approach: Courts disfavor marketability discounts in fair value determinations, reasoning that forced seller shouldn't bear cost of illiquidity when buyout is involuntary.
While this case involved a corporation, Delaware courts apply similar principles to LLCs. Court held that in appraisal/fair value proceedings, no minority discount should be applied. "The remedy of appraisal is meant to compensate stockholders for the pro rata value of their interest, not to penalize them for lacking control."
Professional business valuation is critical for:
Cost: Professional business valuation typically $5,000-$25,000 depending on LLC complexity, revenue size, and depth of analysis required.
Once dissolution is triggered (voluntary, judicial, or by operating agreement events), the LLC enters "winding up" phase - ceasing business operations and liquidating assets to distribute proceeds.
An LLC is dissolved upon:
During winding up, the LLC:
Proceeds distributed in following order:
After creditors paid, remaining proceeds distributed to members according to:
After winding up complete, file Certificate of Cancellation with Delaware Secretary of State to officially terminate LLC's existence.
When members cannot cooperate on winding up, Court of Chancery may appoint receiver:
LLC may give written notice to known creditors and publish notice to unknown creditors. Creditors who fail to file claims within specified period (minimum 60 days) may be barred from recovery.
Proper notice process protects members from post-dissolution creditor claims.
Dissolution triggers significant tax events:
Consult Tax Advisor: Dissolution can trigger substantial tax liabilities. Members may owe taxes even if they receive less cash than their tax basis (phantom income). Plan for tax consequences before agreeing to dissolution.
Rather than selling assets piecemeal, consider:
Sell entire LLC operation to single buyer - typically fetches higher price than liquidation.
Court-supervised auction ensures competitive bidding and fair market value.
Distribute specific LLC assets to members rather than converting to cash (e.g., one member takes real property, another takes equipment, etc.). Requires agreement on valuations.
Dissolution is the nuclear option - it destroys going-concern value and forces liquidation. Before pursuing dissolution, consider less destructive alternatives.
Process: Neutral third-party mediator facilitates negotiation between members to reach settlement.
Advantages:
Best for: Members willing to negotiate in good faith, disputes over valuation or buyout terms, salvageable relationships.
Process: Neutral arbitrator hears evidence and issues binding decision.
Advantages:
Disadvantages:
Note: Many operating agreements require arbitration of dissolution disputes. Check your agreement.
Structure: One member (or group) purchases other member's interest at negotiated price.
Negotiation Points:
"I propose the following buyout structure to avoid dissolution litigation: (1) You purchase my 35% membership interest for $875,000 (based on attached business valuation); (2) Payment terms: $262,500 down payment at closing, remainder of $612,500 paid in 48 monthly installments of $12,760 plus 7% interest; (3) My membership interest serves as collateral - if you default on payments, interest reverts to me; (4) I agree to 3-year non-compete within [geographic area]; (5) Both parties execute mutual release of all claims. This allows you to continue operating the business while providing me fair value for my interest. If we cannot reach agreement within 30 days, I will file dissolution petition."
Rather than exit, restructure to address underlying problems:
If operating agreement contains shotgun clause, use it:
Strategy: Offer price you'd be willing to pay OR accept. Works well when both members have similar financial capacity.
If LLC's primary asset is real property, consider partition action:
In some cases, waiting may be strategic:
Don't Threaten Dissolution Lightly: Dissolution demand is serious escalation. Only use if: (1) you genuinely want to exit or dissolve, (2) you've explored less destructive alternatives, and (3) you're prepared to follow through with litigation if demand is rejected. Empty threats damage credibility.
[Your Name]
[Address]
[City, State ZIP]
[Email]
[Phone]
[Date]
[Other Member(s) Name]
[LLC Name]
[Address]
[City, State ZIP]
Re: Demand for Buyout of Membership Interest; Alternative Petition for Judicial Dissolution Under 6 Del. C. § 18-802
I am a member of [LLC Name], a Delaware limited liability company, holding a [X]% membership interest. I have been a member since [date] and have contributed $[amount] in capital. This letter serves as formal notice that it is no longer reasonably practicable for the LLC to continue operating in conformity with the Operating Agreement, and I am therefore demanding either: (1) that you purchase my membership interest for fair value, or (2) that we proceed with judicial dissolution under 6 Del. C. § 18-802.
The LLC Can No Longer Function According to Its Operating Agreement:
[Choose scenario that applies to your situation:]
[Deadlock Version:] You and I each own 50% of the LLC. The Operating Agreement requires unanimous member consent for [list specific decisions: capital expenditures over $X, hiring/firing employees, entering contracts over $Y, etc.]. We have reached irreconcilable deadlock on the following critical business decisions:
As a result of this deadlock, the LLC has been unable to [describe operational paralysis - cannot hire employees, sign contracts, make necessary investments, etc.] for the past [X] months. [Describe concrete business harm: lost contracts worth $X, key employees departed, competitors captured market share, etc.]. Under Haley v. Talcott, 864 A.2d 86 (Del. 2004), this deadlock makes it "not reasonably practicable" to carry on the LLC's business.
[Failed Purpose Version:] The LLC was formed for the specific purpose of [state purpose from operating agreement]. This purpose can no longer be achieved because [explain why purpose is impossible: key partnership terminated, regulatory approval denied, market conditions changed fundamentally, etc.]. Continued operation serves no purpose and only depletes remaining assets. Under In re Arrow Investment Advisors, LLC, 2015 WL 6718169 (Del. Ch. 2015), failure of LLC's essential purpose makes dissolution appropriate.
[Oppressive Conduct Version:] As the minority member, I have been systematically excluded from LLC management and deprived of the benefits of membership in violation of the Operating Agreement and your fiduciary duties:
This oppressive conduct makes it impossible for the LLC to operate according to its Operating Agreement and gives rise to both dissolution and breach of fiduciary duty claims.
Buyout Proposal to Avoid Dissolution:
Judicial dissolution would be costly for both of us (easily $100,000+ in legal fees) and would destroy the LLC's going-concern value through forced liquidation. I prefer a negotiated buyout that allows you to continue operating the business while providing me fair compensation for my interest.
I have obtained a professional business valuation from [valuation firm] (attached). Based on this independent analysis, the fair value of my [X]% membership interest is $[amount]. This valuation is based on [briefly explain methodology: DCF analysis, market multiples, asset-based approach, etc.].
I propose the following buyout terms:
Response Deadline:
Please respond to this buyout proposal within 30 days of the date of this letter. If you accept, we can proceed to negotiate definitive buyout agreement and close within 60 days.
If you reject this proposal or fail to respond within 30 days, I will immediately file a petition for judicial dissolution in the Delaware Court of Chancery pursuant to 6 Del. C. § 18-802. My petition will seek:
Dissolution litigation will be expensive, time-consuming, and value-destructive for both of us. The buyout I've proposed provides a clean exit for me and allows you to continue operating the business without court interference. It is in both our interests to resolve this matter cooperatively.
However, I am fully committed to pursuing judicial dissolution if necessary. The LLC cannot continue to operate under current circumstances, and I will not remain trapped in a dysfunctional business relationship.
[Optional:] If you believe my valuation is inaccurate, I am willing to participate in mediation with a qualified business mediator to attempt to reach agreement on fair value and buyout terms before resorting to litigation. Mediation would be significantly less expensive and faster than court proceedings.
Please direct all communications regarding this matter to me at [email] or [phone]. I expect your written response within 30 days.
Sincerely,
[Your Signature]
[Your Printed Name]
Member, [LLC Name]
Enclosure: Business Valuation Report
I personally analyze your LLC's operating agreement, evaluate grounds for dissolution under Section 18-802, coordinate with business valuation experts, and draft strategic demand letters to facilitate buyout or dissolution. $450 flat fee includes legal research and attorney signature.
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