November 27, 2021

Volume XI, Number 331

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Delaware Court Of Chancery Dismisses Petition For Equitable Dissolution Of An LLC By A Non-Member

In SolarReserve CSP Holdings v. Tonopah Solar Energy, LLC, C.A. No. 2019-0791-JRS (Del. Ch. Mar. 18, 2020), the Delaware Court of Chancery (the “Court”) dismissed a non-member/non-manager’s petition for equitable dissolution of a limited liability company where there was no statutory basis for dissolution and insufficient evidence of wrongdoing by the members or managers of the limited liability company to warrant such an extreme remedy.

Defendant Tonopah Solar Energy, LLC (“Tonopah”) is a Delaware limited liability company that was formed to build and operate a solar power plant in Nevada. At its formation, plaintiff, SolarReserve CSP Holdings, LLC, a Delaware limited liability company (“SolarReserve”), was its sole owner. In order to obtain additional funding sources, SolarReserve divested its interest through several intermediary holding companies and borrowed funds from the United States Department of Energy (the “DOE”). SolarReserve also entered into a co-venture relationship with a construction firm, Cobra Thermosolar Plants, Inc. (“Cobra”) to build the solar power plant. According to SolarReserve’s complaint, Cobra botched the construction, prompting the DOE to declare an event of default under the governing loan documents, triggering the DOE’s rights to alter Tonopah’s governance structure. The DOE subsequently removed SolarReserve from its position of control over Tonopah. In its complaint, SolarReserve alleged that Tonopah was insolvent and unable to build a solar plant. As such, SolarReserve argued that it was no longer reasonably practicable to carry on Tonopah’s business and asked the Court to equitably dissolve Tonopah. In response, Tonopah filed a motion to dismiss, which the Court granted.

Under Delaware’s Limited Liability Company Act (the “Act”) statutory dissolution of a Delaware limited liability company (“LLC”) is only available to the LLC’s members or managers. Due to its use of several intermediary holding companies, and its default under the DOE loan, SolarReserve acknowledged that it was neither a member nor a manager of Tonopah, and therefore, it did not have standing under the Act to bring a claim for statutory dissolution. Instead, it asked the Court to take the “far-less traveled path” and invoke equitable principles to dissolve Tonopah. The Court declined to do so, because even after giving SolarReserve the benefit of all reasonable inferences, it could not find a basis to justify dissolution as a matter of equity. 

In reaching its decision, the Court acknowledged that Delaware public policy honors the expressed intent of the parties to an LLC agreement and allows for the maximum amount of freedom of contract. In the interest of protecting these values, the Court would only invoke equitable principles to override the plain language of an LLC agreement in the most extreme circumstances. Although SolarReserve’s complaint contained a torrent of accusations against Cobra and the DOE, the Court noted that neither alleged wrongdoers were parties to SolarReserve’s action. In contrast to  cited precedent, the Court found that SolarReserve’s “real relationship” with Tonopah was that of remote, indirect investor, not a member. In support of this conclusion, the Court pointed to the fact that SolarReserve took calculated choices to reshape the ownership structure of Tonopah in order to obtain additional funding. The Court held that if it were to grant SolarReserve’s request for dissolution, it would not be upholding SolarReserve’s rights, but rather, creating new rights that SolarReserve did not bargain for or reasonably expect. The Court also pointed to the fact that SolarReserve’s claims to ownership over Tonopah ran through a holding company, which had pledged all of its right, title, and interest in Tonopah’s limited liability company interests to secure the DOE loan. Because the DOE had foreclosed on the loan, the Court held that SolarReserve could not rely on equity to recoup rights it knowingly bargained away. Finally, the Court found that SolarReserve’s rights to review the books and records of Tonopah, as provided for in Tonopah’s LLC agreement, indicated to the Court that Solar Reserve had the ability to bargain for certain rights, and it did not bargain to have rights akin to a member or the authority to force a dissolution. Thus, the Court granted Tonopah’s motion to dismiss.

Copyright 2021 K & L GatesNational Law Review, Volume X, Number 106
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About this Author

Scott Waxman, Limited Liability Companies, Corporate, Attorney, KL Gates Law FIrm
Administrative Partner

Scott Waxman is a founding partner in the firm’s Wilmington, Delaware office and a member of the firm’s global Management Committee. His practice focuses on organizational and operational issues related to limited liability companies, limited and general partnerships, statutory trusts, and special purpose corporations, as well as general commercial and financial transactions, including structured financings, securitizations, mergers and acquisitions, joint ventures, private equity and hedge funds, preferred securities transactions, insurance premium financing transactions, life settlement...

302-416-7070
Jessica A. Pingleton Corporate/M&A K&L Gates Portland, OR
Associate

Jessica’s practice includes a broad range of business, corporate, and real estate matters, with a particular focus on mergers and acquisitions, corporate governance, private financing, and commercial leasing. She advises emerging and growing companies with respect to choice of entity, business formation, strategic planning and growth, commercial contracting and licensing, private financing, and regulatory compliance. She also drafts and negotiates commercial lease agreements, and navigates clients through commercial and residential purchase and sale transactions from contract to closing....

503.226.5763
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