Deadlock, Oppression and Minority Protection

Scope of the chapter. This chapter examines two related problems of the closely held LLC. The first is deadlock: the members or managers whose agreement the operating agreement requires cannot agree, and the company cannot act on matters that need a decision. The second is oppression: those in control use their control to deprive a minority member of the benefits for which the minority member invested, and the minority member has no market in which to sell and no right to withdraw its capital. The two problems share a cause, which is the combination of illiquid interests, shared management and the absence of a statutory exit. They also share the principal judicial remedy, which is dissolution of the company or an order that one side buy out the other. The chapter examines the statutes that authorize judicial dissolution, the decisions that apply them, the importation of close corporation oppression doctrine into LLC law, the fiduciary and contractual claims that serve the same ends, and the provisions by which careful drafters resolve these problems before they arise.

The legislative choice. The LLC statutes give the members broad freedom to fix their own rights by agreement (see supra ch. 3). Most statutes also preserve a judicial power to dissolve the company when the agreement can no longer be carried out. The statutes divide on whether that power extends to oppression. The Delaware act authorizes dissolution only when "it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement." Del. Code Ann. tit. 6, § 18-802. The uniform act adds a ground for oppressive conduct by those in control and authorizes the court, in a proceeding on that ground, to order a remedy other than dissolution. Rev. Unif. Ltd. Liab. Co. Act § 701(a)(4)(C), (b) (2013). Delaware permits the members to waive judicial dissolution by agreement; the uniform act does not permit the operating agreement to vary the statutory grounds. Id. § 105(c)(9). The choice between these models is one of the most consequential choices a member makes when it selects a formation state (see supra ch. 5).

Organization. The chapter proceeds in nine parts:

1. the minority problem in the closely held LLC (¶ 3210);
2. deadlock, its forms and its causes (¶ 3220);
3. judicial dissolution in Delaware under § 18-802 (¶ 3230);
4. the uniform act's dissolution grounds, its oppression ground and its alternative remedies (¶ 3240);
5. close corporation oppression doctrine and its reception in LLC law, with a survey of state statutes (¶ 3250);
6. fiduciary, contract and implied-covenant claims as alternatives to dissolution (¶ 3260);
7. contractual deadlock breakers (¶ 3270);
8. planning for minority and majority members (¶ 3280); and
9. a drafting checklist (¶ 3290).

Relation to other chapters. Transfer restrictions, which create much of the lock-in examined here, are examined infra ch. 29. Buy-sell agreements, rights of first refusal and drag-along and tag-along rights are examined infra ch. 30, and dissociation, withdrawal and expulsion infra ch. 31. Winding up after a decree of dissolution is examined infra ch. 33. The default fiduciary duties and their modification are examined supra chs. 21 and 22, and information rights supra ch. 20. Freedom of contract and its limits, including the enforceability of waivers of judicial dissolution, are examined supra ch. 3. Receivers and the other equitable remedies are examined infra ch. 38, and forum selection and arbitration infra ch. 37.