An opinion from the Superior Court of Vermont indicates once again why LLC operating agreements need to be drafted with care. In Casella Waste Systems, Inc. v. GR TEchnology, Inc., 2009 Vt. Super. LEXIS 10, the question before the court was whether it had subject matter jurisdiction to dissolve two LLCs organized under Delaware law. The plaintiff sought to have two LLCs judicially dissolved by the Vermont court because the management of the companies was so divided that the members’ business relationship was “irretrievably broken.”
The operating agreements of both LLCs permitted dissolution by “the entry of a decree of judicial dissolution pursuant to the Delaware LLC Act.” Section 18-802 of the Delaware LLC Act provides that “on application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.”
The Vermont court concluded that because the operating agreements specifically referred to the Delaware LLC Act and that act specified the Delaware Court of Chancery as the court with jurisdiction over judicial dissolutions of Delaware LLCs, the Vermont court could not exert subject matter jurisdiction over the dissolution of the LLCs even though the LLCs presumably were owned by Vermont residents and did business in Vermont.
This case raises two points. First, if you choose to form a Delaware LLC, consider whether Section 18-109(d) and Section 18-111, when read together, permits an operating agreement to designate another jurisdiction other than Delaware to have authority over the LLC, its members and managers. Section 18-109(d) clearly permits the members and managers to choose another jurisdiction, but it just as clearly omits LLCs. Unless it can be read that the members or managers may choose on behalf of the LLC to choose another jurisdiction. Section 18-111 uses the word “may” instead of “shall” when stating that the Court of Chancery has authority to “to interpret, apply or enforce the provisions of” an operating agreement.
Second, if you are not going to do business in Delaware, why choose to organize a Delaware LLC? Like all LLC acts, the Delaware LLC Act is nuanced and littered with traps for those unfamiliar with its terms. When in doubt, stay home.