First Department Finds the Sale of 100 percent of Membership Interest in an LLC is Not a “Dissolution” Under the Operating Agreement

In an Opinion, dated September 21, 2023, in Southern Advanced Materials, LLC v. Robert S. Abrams, et al., No. 2022-04949 (1st Dep’t), the First Department found that a corporate transaction involving the sale by a limited liability company of a company it owned, structured as a sale of 100 percent of the LLC’s membership interests in the target company, did not constitute a “dissolution” under the LLC’s operating agreement and Delaware law. The dispute arose when a former stakeholder in the LLC and company sought to recover a preferred return that it was entitled to upon “dissolution” of the LLC. Under the terms of the LLC’s operating agreement, a dissolution would occur upon “the disposition by the [LLC] of substantially all of its assets.” The shareholder therefore argued that the sale met this definition because the acquisition resulted in the disposition of the LLC’s assets (i.e., the target company).

The First Department rejected the shareholder’s argument, explaining:

[S]ection 13.1 [of the operating agreement] provides that a dissolution of [the LLC] occurs only upon “the disposition by the Company of substantially all of its assets” (emphasis added). Apart from the assets transferred to Abrams in the Pre-Closing Restructuring, [the LLC] itself did not dispose of any assets when its previous shareholders sold their equity in the company to Wendel. . . . [the shareolder’s] position that the Wendel transaction constituted a dissolution of [the LLC] under section 13.1 requires it to read the phrase “by the Company” out of the provision, thereby violating the rule that “[a] reading of the contract should not render any portion meaningless” [citations omitted]. . . .

Yet another ground for rejecting [the shareholder’s] reading of section 13.1 is evident. Under Article XIII of the Operating Agreement, a dissolution of CVH entails a process of “Winding Up, Liquidation and Distribution of Assets,” as detailed in section 13.2. . . . Critically, [the shareholder] makes no argument that the property that [the LLC] disposed of in the Pre-Closing Restructuring constituted “substantially all of [CVH’s] assets” within the meaning of section 13.1 of the Operating Agreement and Delaware law (see Gimbel v Signal Cos., Inc., 316 A2d 599, 606 [Del Ch 1974] [holding that “substantially all” of a company’s assets means assets “quantitatively vital to the operation of the corporation” and “affect(ing) the existence and purpose of the corporation”], affd 316 A2d 619 [Del 1974]).

This case demonstrates the importance of language used in an LLC’s operating agreement and the situations owners and shareholders should consider when engaging in even relatively simple corporate transactions. The attorneys at Schlam Stone & Dolan have extensive experience litigating about the provisions in operating agreements and involving corporate transactions. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such litigation.