In a rare case involving judicial dissolution of a joint-venture corporation under Section 273 of the DGCL, the Delaware Court of Chancery granted a petition for dissolution because of a deadlock between the joint venture's two stockholders (In the Matter of Bermor, Inc., , C.A. No. 8401-VCL (Del. Ch. Feb. 9, 2015)). The Court also appointed a trustee to complete the dissolution because the stockholders had not agreed to a plan of dissolution within three months of the filing of the petition with the Court.

The case arose from a dispute between the owners of two partnerships over a decision of whether or not to commit to a refinancing. In 1992, Morton Grossman and Bernie Cohen formed two limited partnerships, Bermor Limited Partnership and Bermor Taunton Limited Partnership, as successors to an entity that had acquired three Massachusetts properties. The partnerships’ purpose was to continue owning the three properties for the benefit of the two founders' families. Presently, there are 25 limited partners on the Grossman side and six on the Cohen side. The general partners of Bermor LP and Bermor Taunton LP are two Delaware corporations, Bermor Inc. and Bermor Taunton Inc., respectively, each formed with virtually identical certificates of incorporation and by-laws. Each GP is a joint venture corporation with two 50% stockholders: Louis Grossman (Morton Grossman's son) and Claire Cohen (Bernie Cohen's widow). Each GP initially had identical boards made up of Louis, his sister Amy Sands and Claire’s two sons, Gerald and Richard.

In 2011, the Grossman limited partners decided they wanted the partnerships to generate more liquidity. Louis proposed a refinancing to Gerald and Richard to generate a distribution to the limited partners, but Gerald and Richard disagreed with the idea, citing adverse tax implications and their philosophy of avoiding debt. Louis continued to push for liquidity, but in October 2012, he proposed instead that either the Cohen family or the Grossman family buy out the other. Again, the families failed to reach an agreement.

In February 2013, Louis, Gerald and Richard met again to discuss the direction of the partnerships and Louis presented four options:

The parties did not reach a conclusion and acknowledged that they were at an impasse over the direction of the partnerships.

In March 2013, Louis filed two actions with the Delaware Court of Chancery, seeking dissolution of the GPs under Section 273 of the DGCL. Louis included with the petition a plan of discontinuance (as required by Section 273(a)), which Claire objected to. The actions were consolidated. Both sides continued to make further proposals to each other during the trial, but never reached an agreement.

After a review of Section 273 and the existing case law interpreting it, the Court granted Louis' petition for dissolution.

Section 273 permits a stockholder of a joint venture that has only two 50% stockholders to petition the Court for dissolution if the stockholders cannot agree on a plan of dissolution between themselves. The Section 273 petition process is a default mechanism; the statute allows the stockholders to provide for their own deadlock-resolution procedures in the certificate of incorporation or in a written stockholders agreement. Under Section 273, the Court is also permitted to appoint one or more trustees to administer and wind up the affairs of the joint venture.

The default statutory process is intended to provide deadlocked stockholders with a resolution in situations where they cannot agree on whether to dissolve the joint venture, on the method of the dissolution or on the means of disposing of the assets (In re Coffee Assocs., Inc., , at *3 (Del. Ch. Dec. 3, 1993)). If the minimum requirements of Section 273 are met, the Court’s discretion to deny the petition for dissolution is limited to a determination of whether there is a bona fide deadlock or whether the petition was brought in bad faith (In re Arthur Treacher's Fish & Chips, (Del. Ch. July 1, 1980)). A finding of bad faith, though, can only be found if the petitioner sought dissolution of the joint venture while knowing that there was not a genuine deadlock about the desirability to dissolve (see In re McKinney-Ringham Corp., , at *5 (Del. Ch. Feb. 27, 1998)). The inquiry for these purposes does not touch on any other decisions or actions by a stockholder, even if they might have been made in bad faith.

The Court in Bermor found that, based on the evidence presented at trial, there was no question that the two 50% stockholders, Louis and Claire, were deadlocked on several issues, including whether to:

Although the parties themselves had characterized their situation as a "deadlock or impasse," Claire brought five challenges to the petition for dissolution:

The Court rejected each challenge in turn, finding that:

After finding a clear presence of a deadlock and no bad faith, the Court had no reason at common law to deny the petition. The Court also ruled to appoint a trustee to dissolve the general partners because the stockholders had not agreed on a plan of discontinuance within three months of filing the petition, as required by Section 273(b).

The Bermor decision highlights the benefit of negotiating and signing a stockholders agreement containing provisions to either resolve deadlocks or dissolve the corporation in a manner agreed to by both stockholders. In 50/50 joint ventures in particular, and even more so when the stockholders are either family members or close friends, the parties often avoid discussing deadlock-resolution procedures out of a belief that they will be able to resolve any future issues or out of a fear of offending the other party. However, the lack of a deadlock-resolution procedure can lead to even worse outcomes than whatever the parties initially thought might transpire. Counsel involved in setting up joint ventures should advise his clients to pre-emptively establish a deadlock-resolution procedure at the time of formation in order to prevent this type of situation (for examples of these types of procedures, see Standard Clause, Stockholders Agreement: Deadlock (with Mediation) and Standard Document, Buy-sell Agreement (Russian Roulette): LLCs.

Even if the parties to a joint venture knowingly choose to forsake written deadlock-resolution procedures, the Bermor decision highlights how little a petitioner needs to show to obtain an order to dissolve the corporation. As the Court explained, the petitioner only needs to demonstrate that it has not brought the petition in bad faith and that an impasse actually exists. Conversely, the Court will not examine the substance of the dispute or whether dissolution is the only way to solve the deadlock, nor will it put any weight on the length of time of the dispute. The outcome therefore depends largely on the parties themselves and whether they are able to agree on a plan of dissolution or whether they leave it to the Court to appoint a trustee.