Section 801. Events Causing Dissolution and
Winding Up of Company's Business

A limited liability company is dissolved, and its business must be wound up, upon the occurrence of any of the following events:

(1) an event specified in the operating agreement;

(2) consent of the number or percentage of members specified in the operating agreement;

(3) an event that makes it unlawful for all or substantially all of the business of the company to be continued, but any cure of illegality within 90 days after notice to the company of the event is effective retroactively to the date of the event for purposes of this section;

(4) on application by a member or a dissociated member, upon entry of a judicial decree that:

(i) the economic purpose of the company is likely to be unreasonably frustrated;

(ii) another member has engaged in conduct relating to the company's business that makes it not reasonably practicable to carry on the company's business with that member;

(iii) it is not otherwise reasonably practicable to carry on the company's business in conformity with the articles of organization and the operating agreement;

(iv) the company failed to purchase the petitioner's distributional interest as required by Section 701; or

(v) the managers or members in control of the company have acted, are acting, or will act in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial to the petitioner;

(5) on application by a transferee of a member's interest, a judicial determination that it is equitable to wind up the company's business:

(i) after the expiration of the specified term, if the company was for a specified term at the time the applicant became a transferee by member dissociation, transfer, or entry of a charging order that gave rise to the transfer; or

(ii) at any time, if the company was at will at the time the applicant became a transferee by member dissociation, transfer, or entry of a charging order that gave rise to the transfer; or

(6) the expiration of the term specified in the articles of organization.

Comment

The dissolution rules of this section are mostly default rules and may be modified by an operating agreement. However, an operating agreement may not modify or eliminate the dissolution events specified in subsection (a)(3) (illegal business) or subsection (a)(4) (member application). See Section 103(b)(6).

The relationship between member dissociation and company dissolution is set forth under subsection (a)(1). Unless member dissociation is specified as an event of dissolution in the operating agreement, such dissociation does not dissolve the company. New and important Internal Revenue Service announcements clarify that the failure of member dissociation to cause or threaten dissolution of a limited liability company will not cause the company to be taxed like a corporation.

A member or dissociated member whose interest is not required to be purchased by the company under Section 701 may make application under subsection (a)(4) for the involuntary dissolution of both an at-will company and a term company. A transferee may make application under subsection (a)(5). A transferee's application right, but not that of a member or dissociated member, may be modified by an operating agreement. See Section 103(b)(6). A dissociated member is not treated as a transferee for purposes of an application under subsections (a)(4) and (a)(5). See Section 603(b)(1). For example, this affords reasonable protection to a dissociated member of a term company to make application under subsection (a)(4) before the expiration of the term that existed at the time of dissociation. For purposes of a subsection (a)(4) application, a dissociated member includes a successor in interest, e.g., surviving spouse. See Comments to Section 601.

In the case of applications under subsections (a)(4) and (a)(5), the applicant has the burden of proving either the existence of one or more of the circumstances listed under subsection (a)(4) or that it is equitable to wind up the company's business under subsection (a)(5). Proof of the existence of one or more of the circumstances in subsection (a)(4), may be the basis of a subsection (a)(5) application. Even where the burden of proof is met, the court has the discretion to order relief other than the dissolution of the company. Examples include an accounting, a declaratory judgment, a distribution, the purchase of the distributional interest of the applicant or another member, or the appointment of a receiver. See Section 410.

A court has the discretion to dissolve a company under subsection (a)(4)(i) when the company has a very poor financial record that is not likely to improve. In this instance, dissolution is an alternative to placing the company in bankruptcy. A court may dissolve a company under subsections (a)(4)(ii), (a)(4)(iii), and (a)(4)(iv) for serious and protracted misconduct by one or more members. Subsection (a)(4)(v) provides a specific remedy for an improper squeeze-out of a member.

In determining whether and what type of relief to order under subsections (a)(4) and (a)(5) involuntary dissolution suits, a court should take into account other rights and remedies of the applicant. For example, a court should not grant involuntary dissolution of an at-will company if the applicant member has the right to dissociate and force the company to purchase that member's distributional interest under Sections 701 and 702. In other cases, involuntary dissolution or some other remedy such as a buy-out might be appropriate where, for example, one or more members have (i) engaged in fraudulent or unconscionable conduct, (ii) improperly expelled a member seeking an unfair advantage of a provision in an operating agreement that provides for a significantly lower price on expulsion than would be payable in the event of voluntary dissociation, or (iii) engaged in serious misconduct and the applicant member is a member of a term company and would not have a right to have the company purchase that member's distributional interest upon dissociation until the expiration of the company's specified term.