In this most-recent case, plaintiff SolarReserve CSP Holdings LLC (SolarReserve) was not a member or manager of Tonopah Solar Energy, LLC (Tonopah or the Company) when SolarReserve sought to dissolve the Company.⁸ Thus, SolarReserve could not seek dissolution of Tonopah under Delaware’s LLC Act, which only conveys standing to members or managers to seek dissolution.⁹ SolarReserve instead sought to invoke the Court of Chancery’s equitable powers to force the dissolution of Tonopah.¹⁰ However, the court declined to use its equitable power of dissolution because doing so would have violated the plain meaning and intent of Tonopah’s LLC agreement and the Delaware LLC Act.

Tonopah was formed to build and operate a solar power plant in Nevada.¹¹ During Tonopah’s infancy, SolarReserve was its sole member.¹² However, facing a need for capital, Tonopah entered into a $700 million loan agreement with the United State Department of Energy (DOE).¹³ Tonopah then hired Cobra Thermosolar Plants, Inc. (Cobra) to design and build the power plant.¹⁴ SolarReserve surrendered its sole interest in Tonopah and assumed the $700 million debt to the DOE.¹⁵ SolarReserve still held an “indirect interest” in Tonopah through SolarReserve’s ownership of three holding companies, one of which, Tonopah Solar Energy Holdings II (Holdings), was Tonopah’s sole member.¹⁶

SolarReserve alleged Cobra missed several construction deadlines and performed poor-quality work.¹⁷ As a result of these alleged delays and poor workmanship, SolarReserve claims the Nevada Power Company d/b/a NV Energy (NVE) refused to purchase the power Tonopah was set to produce, and this refusal by NVE triggered a default under the DOE loan agreement.¹⁸ This default allowed the DOE to replace Tonopah’s board of managers with its own nominees and place Holding’s Tonopah units with a collateral agent for the DOE’s benefit. ¹⁹ SolarReserve brought an action in the Delaware Court of Chancery seeking equitable dissolution because, SolarReserve alleges, “Tonopah is insolvent and without any realistic possibility of fulfilling its stated purpose (building a solar power plant)” and selling that power to NVE.²⁰

The court began its analysis by observing “Delaware courts take care to … honor the expressed intent of the parties to an LLC agreement as determined from the language of the agreement.”²¹ “Except in the most extreme circumstances, th[e] court will not invoke equitable principles to override the plain language of an” LLC agreement or the Delaware LLC Act.²²

The court rejected SolarReserve’s claim that it “made calculated choices to reshape Tonopah’s complicated ownership structure” to secure additional financing, and these “calculated choices” are grounds for equitable dissolution.²³ First, the court observed Tonopah’s LLC agreement “unambiguously states, ‘[Holdings is] the sole member of [Tonopah].”’24 Therefore, if the court were to allow SolarReserve to act as a member and force dissolution, it “would not be ‘upholding’ rights, [it] would be creating new [rights] SolarReserve did not bargain for or reasonably expect.”²⁵ As the court stated, “[t]his inescapable reality is further revealed in the fact that SolarReserve’s claim to ownership runs through Holdings, which has pledged all of its ‘right, title and interest in … [Tonopah’s] limited liability company interests’ to a collateral agent to secure the DOE [l]oan.”²⁶ Now that the DOE has foreclosed on the loan, “SolarReserve cannot rely on equity to recoup rights it knowingly bargained away.”²⁷

Second, the court rejected SolarReserve’s argument that since it has certain rights in Tonopah that are more commonly held by LLC members, such as the right to obtain the LLC’s books and records, this reflects an intent to confer “member status” on SolarReserve for all matters.²⁸ “The fact that SolarReserve knew how to retain [certain] rights, while giving up others, does not engender a sense that equity is needed … to vest SolarReserve with rights for which it did not bargain.”²⁹ At bottom, “SolarReserve cannot swoop in on the wings of equity as if it were a Tonopah member to impose its preferences for [Tonopah’s] future when [SolarReserve] bargained away that status.”³⁰

Takeaway

Judicial dissolution, either statutorily or through equity, and albeit used sparingly, is a remedy the Delaware Court of Chancery will undoubtedly be forced to consider with greater frequency, especially in times of economic turbulence. When a party is not a member or manager of an LLC, that party is barred from seeking statutory dissolution of the company. However, under the Delaware Court of Chancery’s inherent equitable powers, non-members and non-managers may seek equitable dissolution when it appears manifest that equity so requires. This is applicable to other entities, like limited partnerships and, perhaps, corporations. In those “extreme circumstances,” a plaintiff has a high (although not insurmountable) burden.

1. See SolarReserve CSP Holdings, LLC v. Tonopah Solar Energy, LLC, 2020 WL 1291638, at *1 (Del. Ch. Mar. 18, 2020).
2. See, e.g., 8 Del. C. Section 275 (the Delaware General Corporation Law allows for dissolution of Delaware corporations after a majority vote of the corporation’s stockholders on a resolution passed by the board of directors); 6 Del. C. Section 17-801(2)-(3) (a Delaware limited partnership can be statutorily dissolved by a two-thirds vote of all of the general and limited partners, or upon the withdrawal of all of the general partners).   
3. See 6 Del. C. Section 18-801(a).
4. See 6 Del. C. Section 18-801(a)(5). Other scenarios for dissolution in Delaware’s LLC Act include (i) the expiration of the LLC’s lifespan as stated in the LLC agreement, (ii) the occurrence of any events in the LLC agreement that trigger dissolution, (iii) a two-thirds vote of the LLC members, and (iv) the LLC no longer having any members. See 6 Del. C. Section 18-801(a)(1)-(4).
5. See In re Carlisle Etcetera LLC, 114 A.3d 592, 601 (Del. Ch. 2015) (granting equitable dissolution of an LLC and observing the Court of Chancery cannot be divested (by statute or agreement) of its inherent authority to order dissolution “where it appears manifest that equity so requires”).
6. See SolarReserve CSP Holdings LLC, 2020 WL 1291638, at *5 (quoting In re Arrow Inv. Advisors, LLC, 2009 WL 1101682, at *2 (Del. Ch. Apr. 23, 2009)).
7. See SolarReserve CSP Holdings LLC, 2020 WL 1291638, at *5.
8. Id.
9. See 6 Del. C. Section 18-802.
10. See SolarReserve CSP Holdings LLC, 2020 WL 1291638, at *5.
11. Id. at *1.
12. Id.
13. Id. at *2.
14. Id.
15. Id.
16. See SolarReserve CSP Holdings LLC, 2020 WL 1291638, at *2.
17. Id. at *3.
18. Id.
19. Id.
20. Id.
21. See SolarReserve CSP Holdings LLC, 2020 WL 1291638, at *4.
22. Id.
23. Id. at *7
24. Id. (alteration in original).
25. Id.
26. Id.
27. See SolarReserve CSP Holdings LLC, 2020 WL 1291638, at *7.
28. Id.
29. Id. at *8.
30. Id.

Client Alert 2020-193