A recent decision of the Delaware Court of Chancery serves as a useful reminder of the need to consider provisions for resolving deadlocks in LLC agreements. In In re Interstate General Media Holdings, LLC, two managing members of a Delaware LLC agreed that their dispute had made it impossible to carry on the business of the company, and that the company should be judicially dissolved (C.A. No. 9221-VCP (Del. Ch. Apr. 25, 2014)). However, they disagreed on how the dissolution should be implemented. The petitioner-member argued that the court should order that the LLC be sold at an auction in which only the LLCs members and a specific labor union would be eligible to participate. The petitioner also requested that the auction be structured as an "open outcry" auction. The respondent member, by contrast, wanted the company to be sold at an auction open to anyone, but in which bidders would submit sealed bids.

The reason the dispute came up at all was that the agreement said nothing about any procedures for the dissolution of the company. Instead, the parties only agreed to judicial dissolution if the company must be dissolved. The petitioner tried to argue that other provisions of the agreement, when read in their totality (especially the transfer and confidentiality provisions), indicated an underlying preference in the agreement for both speed and secrecy. Therefore, the petitioner argued that the court should select an auction process that would uphold those underlying principles.

The court rejected this argument. In pertinent part, it held that if the parties do not describe how dissolution should work, but do agree to judicial dissolution, they essentially hand over the decision for the dissolution process to the court. In that situation, the court does not have to try to extrapolate the LLC agreement's unwritten theory of the ideal dissolution procedures and is free to choose its own process. (As it happened, the court still agreed to use the petitioner's suggestion of an open-outcry auction limited to the members and labor union.)

Practical Law has several resources to aid in the negotiation and drafting of deadlock procedures, particularly for joint-venture LLC agreements. For an overview explaining why exit and termination provisions are useful and exploring the primary issues in drafting and negotiating these provisions, see Practice Note, Joint Ventures: Exits and Terminations.

One method for resolving deadlocks among members of an LLC is to agree to a buy-sell agreement. A buy-sell ends the deadlock by removing one of the members from ownership in the company, either by selling its membership interest or buying out the other member. The buy-sell can either be drafted within the broader LLC agreement, or written and executed as a stand-alone agreement.

The buy-sell can be structured in several ways. One method is for one member to notify the other that it is making an offer to either buy or sell its membership interest based on a stated price. The receiving party then decides whether to be the buyer or the seller using the stated price. This is often referred to as a "Russian Roulette" provision. For an example of a stand-alone Russian Roulette buy-sell agreement, see Standard Document, Buy-sell Agreement (Russian Roulette): LLCs. For an example of buy-sell provisions contained within the LLC agreement, along with further discussion of other buy-sell procedures, see Standard Document, LLC Agreement (Two member-Managing Member-Managed): Section 7.07 (Deadlock).

A less drastic approach to resolving a deadlock is through mediation. For a set of provisions for agreeing to resolve deadlocks through mediation, see Standard Clause, LLC Agreement: Deadlock (with Mediation).