Background
Seokoh, Inc. (Seokoh) and Lard-PT, LLC (Lard) entered into a joint venture agreement to operate Process Technologies and Packaging, LLC (PTP or the Company). The PTP operating agreement (the Agreement) included a provision for resolving a deadlock between Seokoh and Lard. Specifically, in the case of a deadlock, the two chief executive officers of PTP’s parent companies would meet in an attempt to resolve. If the deadlock remained unresolved, the Agreement provided a mechanism whereby either Seokoh or Lard had the ability to buy or to be bought out by the other member of the joint venture.
The Agreement also contained an exclusive forum selection clause that stated that any “suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement …whether in contract, tort, or otherwise, shall be brought exclusively in the state or federal courts located in New York, New York.”
After the parties found themselves in a deadlock, the procedures in the Agreement failed to remedy the impasse, and the parties remained at loggerheads for approximately two years. During this time, PTP was losing money as well as key personnel. Seokoh filed suit in a New York court, claiming that Lard was in breach of the deadlock procedure. Lard counterclaimed, alleging that Seokoh was the breaching party and sought specific performance under the Agreement. The New York court determined on summary judgment that Lard’s theory was flawed, and that it could not obtain specific performance. The remaining issues in New York were stayed.
On July 23, 2020, Seokoh filed a petition of dissolution in the Delaware Court of Chancery alleging it was no longer reasonably practicable for PTP to carry on its business affairs in conformity with the Agreement. Lard sought a TRO in New York to stop the Delaware action, which was granted and later vacated once the New York court rejected Lard’s claims of breach.
Lard moved to dismiss the Delaware action, arguing that dissolution was unwarranted because the Agreement provides a sufficient means by which Seokoh can buy Lard out of the joint venture – the same theory that was considered and rejected in New York – and any such action regarding the deadlock procedure must be brought in New York under the Agreement’s forum selection clause. Lard also claimed that Seokoh failed to state a claim for dissolution.
Analysis
The court began its analysis by determining whether it had authority to decide Lard’s buy/sell option theory in spite of the forum selection clause, which requires that all claims arising out of the Agreement be brought in a New York court. In deciding that it did have the authority to evaluate Lard’s claim, the court stated, “It is well-settled in New York that New York courts do not have subject matter jurisdiction to order dissolution of foreign business entities; instead, that question is rightfully addressed to the courts of the state in which the entity was created.” Thus, the court held, New York courts lack jurisdiction to issue a decree of judicial dissolution for PTP. The court then observed that since Seokoh chose to bring an action for dissolution in Delaware, the Court of Chancery needed to determine whether there was a viable exit mechanism in the Agreement to break the deadlock.
The court found that the deadlock-breaking mechanism in the Agreement was ineffective because that provision does not mandate (i) a price that must be paid for PTP’s units, (ii) a pricing formula for PTP’s units, or (iii) a closing time line at which either Seokoh or Lard can buy out the other member. Instead, negotiations between the two deadlocked members are required to fill these gaps in the Agreement. Since the two members had already demonstrated their inability to negotiate and come to mutually agreeable terms, the deadlock mechanism in the Agreement was insufficient.
The court also found that Seokoh adequately pled a claim for dissolution. First, the court held that despite Seokoh having a 51 percent vote on routine matters, both parties had to agree on more material governance issues, such as (i) the location of the PTP facilities, (ii) the Company’s finances, (iii) the appointment of a CEO, and now (iv) dissolution.
The court also found that Seokoh pled a claim for dissolution regarding PTP’s financial condition. Seokoh claimed that the Company was “hemorrhaging cash,” defaulting on loans, and was unable to appoint key management personnel, and thus, there was essentially no business for the board to manage. Therefore, since the deadlock mechanism in the Agreement was inoperable, and Seokoh had pled a claim for dissolution, the court denied Lard’s motion to dismiss.
Key takeaways
The Delaware Court of Chancery routinely enforces forum selections clauses, whether those clauses require that Delaware courts or the courts of other jurisdictions hear the matter. However, in cases where dissolution of a Delaware entity is at issue, the Court of Chancery can retain jurisdiction to determine issues that otherwise were agreed to by the parties to be brought outside of Delaware, such as a dissolution mechanism in an LLC’s operating agreement.
- 2021 WL 1197593 (Del. Ch. Mar. 30, 2021).
Client Alert 2021-129
