Reed Smith Client Alerts

In Mehra v. Teller, No. 2019-0812-KSJM, 2021 WL 300352 (Del. Ch. Jan. 29, 2021), the Delaware Court of Chancery recently denied a manager’s request to invalidate the dissolution of a Delaware limited liability company, determining that a genuine deadlock between the limited liability company’s LLC managers existed – and deserved legal effect – even though the circumstances giving rise to the deadlock were contrived.

The dispute in Mehra v. Teller arose out of the dissolution of EOS Investor Holding Company, LLC (Holdco), a consumer goods company. Before the disputed dissolution, the plaintiff, Sanjiv Mehra, and the defendant, Jonathan Teller, had shared control of Holdco for years. Although the defendant, a founder of Holdco, held a greater equity stake in the company, the plaintiff had responsibility for most of Holdco’s day-to-day management. The two agreed that these contributions warranted granting equal say over member and board decisions, and that they would each have a right to equal distributions above a specified threshold.

The parties’ agreements on shared control and equal distributions were memorialized in Holdco’s LLC Agreement (the LLC Agreement). In relevant part, the LLC Agreement made the parties managers on the two-person board and required unanimity to effect board action. If the parties were deadlocked, the LLC Agreement provided that Holdco would be automatically dissolved. Further, in the event of a deadlock-based dissolution, Holdco would distribute its shares of a first-tier subsidiary to Holdco members in proportion to their equity stakes, and the members would replicate the plaintiff’s equal-distribution rights at the first-tier subsidiary level.

After several successful years, Holdco suffered a series of setbacks that soured the parties’ relationship, created financial difficulties, and left the defendant strapped for cash. Under the LLC Agreement’s deadlock provision, one member could propose a business divorce to the board, declare deadlock if the other disagreed, and exit the shared-control arrangement between the two parties. As such, the defendant held a meeting where he proposed a resolution to remove the plaintiff as CFO of a Holdco subsidiary. Because the parties could not agree on this resolution, the defendant declared the board deadlocked and dissolved Holdco.