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The bitter end: Court draws roadmap for business divorces.

Writer's picture: W. Cory ReissW. Cory Reiss

A business split down the middle can be hard to run when its partners come to hate each other.


But even when the anger is palpable, it may not be clear that a judge has authority to dissolve a company because it isn’t “practicable” to operate anymore due to a deadlock among members.


The governing statute allows dissolution of a  limited liability company, or LLC, for limited reasons, one of them being that it has become “not practicable” to operate the company in conformity with its operating agreement. A classic example is an LLC owned 50-50 by two family members (or teams of aligned members) for the purpose of holding real estate, one of whom wants to sell the property while the other does not. 


That’s the scenario in James H.Q. Davis Tr. V. JHD Props., LLC, which finally prompted the North Carolina Supreme Court this week to establish a test for judges asked to order a business divorce of “deadlocked” partners in LLCs. The six-factor test the Supreme Court adopted requires a judge to consider:


  1. whether the management of the company is unable or unwilling to work together to reasonably engage in or promote the purpose for which the company was formed;

  2. whether there is deadlock between the managers;

  3. whether the operating agreement provides a means of navigating around such deadlock;

  4. whether, due to the company’s financial position, there is still a business to operate;

  5. whether continuing the company is financially feasible; and

  6. whether a member or manager has engaged in misconduct.


A partner advocating the company be dissolved doesn’t need to show all six factors are satisfied, and the facts may cause some factors to weigh more heavily than others.  But the test provides a roadmap for judges to follow when deciding whether carrying on with business as usual is “not practicable,” a term the Court now defines as “unfeasible,” which lies somewhere short of impossible.   


Ultimately, as with most factor-based tests, the judge’s gut will play a major role in this decision.


Still, the opinion is a guide for lawyers drafting LLC operating agreements.  Whether the company is managed by the members or by designated managers, and if the latter by how many and who, becomes critical for a potential endgame if the members become sick of each other.  Exit strategies for disaffected members take on added importance as well.  Articulation of the company’s purpose, often stated generally as “any and all lawful purposes in which an LLC is allowed by law to engage,” should no longer be treated as boilerplate. 


For now, members wanting out of a split LLC have to read this case as the roadmap to freedom from their tyrannical partners — or to a cul-de-sac for their litigation strategy.  The operating agreement already contains the signs of which destiny lies ahead.

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