Seeking Judicial Dissolution of a California LLC

Under California’s Limited Liability Company (LLC) law, a manager or member is entitled to seek a judicial order dissolving the LLC. Such action is available when any of certain events occur:

(1) It is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement;
(2) Dissolution is reasonably necessary for the protection of the rights or interests of the complaining members;
(3) The business of the limited liability company has been abandoned;
(4) The management of the limited liability company is deadlocked or subject to internal dissension; or
(5) Those in control of the limited liability company have been guilty of, or have knowingly countenanced, persistent and pervasive fraud, mismanagement, or abuse of authority.

Those LLC members opposing dissolution, however, have the ability to halt the action by conducting a “buyout”—i.e., “by purchasing for cash the membership interests owned by the members so initiating the [dissolution] proceeding … at their fair market value.”

Does an LLC Dissolution Vote Extinguish Buyout Rights?

Notably, dismissal of the dissolution action does not prevent any buyout from moving forward. But what if—instead of dismissing the dissolution action—the members favoring dissolution simply vote for it? Section 17707.01 of the Corporations Code states that “[a] limited liability company is dissolved, and its activities shall be wound up, upon the happening of the first to occur of the following: … (b) By the vote of 50 percent or more of the voting interests of the members of the limited liability company or a greater percentage of the voting interests of members as may be specified in the articles of organization, or a written operating agreement.” Would such a vote defeat the buyout attempt?

This was the question raised by a recent case in the California Court of Appeal. The LLC members were hopelessly divided on whether or not to sell its only asset. Members holding 50% sued for dissolution, but the dissenting 50% members managed to stay the case so they could conduct a buyout. While the motion for stay was pending, however, the plaintiffs (again, holding 50% of voting interests), voted for dissolution pursuant to section 17707.01(b). Nevertheless, the court continued to move forward with the buyout.

The Court of Appeal, however, granted plaintiffs’ writ of supersedeas and ordered the trial court to dismiss the buyout proceeding as moot, explaining that:

The statute states unequivocally that an LLC “is dissolved, and its activities shall be wound up, upon the happening of the first to occur” of the events listed, one of which is a vote to dissolve. (§17707.01.) Before that vote, defendants filed their buyout motion in the judicial dissolution proceeding, but we see nothing in the statute or other law to suggest that the mere filing of the buyout motion somehow operated to prevent members from voting to dissolve the LLC. The buyout procedure did not begin until the court ordered the stay of the dissolution proceeding 39 days after the vote to dissolve. Under the statute, the LLC was dissolved in accordance with that vote, and its activities are now required to be wound up.

Thus, a proper vote to dissolve an LLC extinguishes the right of dissenting members to prevent dissolution via a buyout, at least where the vote precedes the commencement of the buyout procedure, and even if a motion for the buyout precedes the vote.

The Rule is Different for California Corporations

The Court noted that this rule for LLCs—i.e., where the vote extinguishes buyout rights—is different from that which applies to California corporations. In the latter case, if shareholders representing only 50 percent of the voting power of the corporation vote to dissolve, holders of the other 50 percent still retain the right to avoid dissolution by buying them out.