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Business Divorces: What Happens When Partners Separate

| Jan 26, 2016 | Delaware Law Update, LLC, New York Law Update, Uncategorized

Photo by Alberto G / CC BY 2.0

A Delaware Case: Meissner v. Yun. In our previous blog series on business divorce (available here), we focused on the break-up between two or more business owners due to disagreement or other circumstances, leading to a deadlock, forced sale of the business, or total dissolution. Oftentimes, disputes arise either because there is no written agreement, or if there is, it is poorly drafted, inadequately addressing keys terms like ownership, buy-out, and dispute resolution mechanisms. As we emphasized over and over, the importance of advance planning and carefully thought-out “business prenup” should not be underestimated.

The recent opinion in Meissner v. Yun may be notable for its holding that an LLC member may not bring a derivative action (that is, an action brought by a shareholder on behalf of the company when management has failed to do so) on behalf of a dissolved LLC under Delaware law, but it is also a good reminder of the importance of a written agreement that spells out each business partner’s rights and obligations with specificity.[1]

In Meissner v. Yun, two business partners formed a Delaware LLC called Manhattan Review LLC to prepare students for standardized tests.[2] Meissner, a German citizen, had previously instructed students in Europe and sought entry into the U.S. market, while Yun, a New York State resident, was given operational control of the company.[3] When the relationship between the two soured, Yun dissolved the LLC by filing a Certificate of Cancellation and formed another Delaware LLC on her own.[4] As it turned out, Meissner and Yun did not have a signed operating agreement (these are also called LLC Agreements, Member Agreements, Company Agreements or other terms in different states and contexts), which led to a dispute surrounding ownership.[5] Specifically, Meissner claimed that Yun was initially assigned a 20% stake, which was later expanded to 30%, while Yun contended that Meissner was never a bona fide owner, even though he presented her with an operating agreement proposing that she became a 25% owner, an offer she never agreed to, and claimed that she was the sole owner of the company, paying over $700,000 to cover all start-up costs and expenses herself.[6] Ultimately, Meissner sued, individually and derivatively on behalf of the company, claiming that Yun, by dissolving the company and forming a new company in the same field, appropriated the company’s assets, materials, employees, and customers to benefit her new company, and asserting breach of fiduciary duty, self-dealing, tortious interference with economic advantage, and unjust enrichment, among other things, on behalf of the company.[7]

When the opinion was issued, the case was at a point where Yun moved to dismiss the above claims, arguing that Meissner lacked the legal capacity to bring derivative claims on behalf of a dissolved LLC in the absence of an action to nullify the Certificate of Cancellation.[8] Indeed, to pursue a derivative action on behalf of a dissolved LLC under Delaware law, a plaintiff must first successfully file a petition with Delaware’s Court of Chancery to nullify or rescind the Certificate of Cancellation.[9] The court found that Delaware law allows any member or manager to apply for the dissolution of an LLC whenever it is not reasonably practicable to carry on the business, which Yun did, but also allows “any creditor, member or manager of the limited liability company, or any other person who shows good cause therefor” to modify the Certificate of Cancellation, which Meissner did not.[10] Thus, the court dismissed Meissner’s derivative claims, in favor of Yun, meaning no factual issues remain and there is no need for trial in that regard.[11]

If you have any questions about the content of this blog or other legal issues not discussed here, please contact us.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or <a ” ” target=”_blank” href=””>

[1] See generally Meissner v. Yun, 2015 N.Y. Slip. Op. 31181(U) (Sup. Ct. N.Y. Cty. July 6, 2015).

[2] Id.

[3] Id. at 1–2.

[4] Id. at 2.

[5] Id.

[6] Id.

[7] Id. at 3–5.

[8] Id. at 6.

[9] Id. (internal citations omitted).

[10] Id. at 8–9 (internal citations omitted).

[11] Id. at 11–12.