As it turns out, quite a bit. In In re GR BURGR, LLC, C.A. No. 12825-VCS (August 25, 2017), Vice Chancellor Slights granted the petitioner’s motion for judgment on the pleadings to dissolve GR BURGR, LLC under 6 Del. C. § 18-802. Vice Chancellor Slights found, based on the facts admitted by the respondent, that “it is no longer ‘reasonably practicable’” for GR BURGR to carry on its business pursuant to its operating agreement after the respondent, Rowen Seibel (“Seibel”), who was Gordon Ramsay’s business partner in GR BURGR, was convicted of felony federal tax offenses. Apparently celebrity chefs, just like average joes, need to carefully weigh their options with respect to the drafting of LLC operating agreements and those with whom they choose to do business.
In this matter, GR US Licensing, LP (“GRUS”) – an entity owned by and affiliated with Gordon Ramsay – petitioned for dissolution of GR BURGR. In 2012, GRUS/Gordon Ramsay teamed up with Seibel to create GR BURGR for the stated business purpose of creating and operating “first-class burger-themed restaurants.” GRUS and Seibel each own a 50% membership interest in GR BURGR. The GR BURGR operating agreement (the “Operating Agreement”) provided that both GRUS and Seibel are entitled to appoint one manager with full authority to manage GR BURGR. Under the Operating Agreement, all management decisions must be made by a majority of managers – which, considering there are only two managers, requires unanimous action. The Operating Agreement provides no means by which to break a deadlock if the two managers cannot agree. Lastly, the Operating Agreement provides that GR BURGR will be dissolved under the following circumstances: “(a) the LLC ceases its business operations on a permanent basis; (b) the sale or transfer of all or substantially all of the assets of the LLC; (a) [sic] the entry of a decree of judicial dissolution; or (b) [sic] as otherwise determined by the Managers.” Thus, because the Operating Agreement provides for dissolution upon “entry of a decree of judicial dissolution,” it allows for dissolution pursuant to 6 Del. C. § 18-802.
Contemporaneously with the execution of the Operating Agreement, GRUS executed an agreement with GR BURGR, whereby GRUS licensed, among other things, the trademark “BURGR Gordon Ramsay” to GR BURGR (the “Licensing Agreement”). GR BURGR then proceeded to develop its burger restaurant concept, recipes and menu, which, together with the trademarks, are defined as “Company Rights” in the Operating Agreement.
In mid-December 2012, GR BURGR entered into an agreement with Caesars Entertainment Corp. to sublicense the trademark “BURGR Gordon Ramsay” as well as certain recipes, menus and other intellectual property to Caesars for use in the BURGR Gordon Ramsay restaurant in the Planet Hollywood resort and casino in Las Vegas (the “Caesars Agreement”). Because Caesars’s businesses are subject to licenses issued by the Nevada Gaming Commission, among other entities, the Caesars Agreement conditioned the rights and obligations of each party under the agreement on the satisfaction that GR BURGR and its members, managers and affiliates are not and do not become “Unsuitable Persons.” Unsuitable Persons are broadly defined under the Caesars Agreement but, essentially, are any persons who could jeopardize Caesars’s ability to retain its various gaming and liquor licenses. The Caesars Agreement provides Caesars with the ability to determine whether a person associated with GR BURGR is an Unsuitable Person based on its “sole and exclusive judgment.” Should Caesars determine that someone associated with GR BURGR is an “Unsuitable Person,” GR BURGR must terminate the relationship and cease all activity causing the determination of unsuitability to Caesars’s satisfaction, or, if the relationship cannot be terminated or cured to Caesars’s satisfaction, Caesars can terminate the Caesars Agreement. GR BURGR had no business other than the BURGR Gordon Ramsay restaurant.
Seibel pled guilty to one felony count of “impeding the administration of the Internal Revenue Code” in April 2016 and was sentenced in August 2016. Shortly after the sentencing, Caesars sent a letter to GR BURGR stating that, based on the felony conviction, Seibel was an Unsuitable Person under the Caesars Agreement and demanding that GR BURGR terminate its relationship with Seibel within ten business days of the letter. GRUS then sent a letter to Seibel that he terminate his relationship with GR BURGR and execute all necessary documents to effectuate that termination. In response, Seibel proposed a transfer of his interest in GR BURGR to a family trust. Caesars rejected Seibel’s proposal, and GRUS renewed its request for Seibel to terminate his relationship with GR BURGR. Seibel refused. Caesars then terminated the Caesars Agreement based on GR BURGR’s failure to disassociate with Seibel. GRUS then terminated the Licensing Agreement, and thus GR BURGR no longer had the right to use the trademark “BURGR Gordon Ramsay.”
With GR BURGR having no business and one of its members convicted of tax fraud, GRUS filed a petition to judicially dissolve GR BURGR in October 2016. Approximately a month later, Seibel filed an answer and counterclaim raising a myriad of claims against GRUS for breach of the Licensing Agreement, breach of fiduciary duty and misappropriation. Seibel’s counterclaims are based on his allegations that Gordon Ramsay, through GRUS, sought to usurp GR BURGR and Seibel’s “corporate opportunities” via a “collusive plot” with Caesars. In December 2016, GRUS moved for judgment on the pleadings on its dissolution petition.
The Court of Chancery granted GRUS’s motion for judgment on the pleadings after finding, pursuant to Section 18-802, that it was no longer “reasonably practicable” for GR BURGR “to carry on [its] business in conformity with” the Operating Agreement. In coming to its conclusion, the Court noted that the “not reasonably practicable” standard of Section 18-802 does not mean that the petitioner needs to prove “that the purpose of the limited liability company has been ‘completely frustrated.’” The Court also noted that, in the context of the judicial dissolution of an LLC, while Delaware law does not provide a “blueprint” for determining whether it is “not reasonably practicable” for the LLC to continue, there are several non-dispositive factual circumstances that the Court will take into consideration. Those circumstances are (1) whether the members’ vote is deadlocked at the board level; (2) whether the operating agreement gives no means of navigating around the deadlock; and (3) whether, due to the financial condition of the company, there is effectively no business to operate. The Court also noted that Delaware law has drawn parallels between dissolution of an LLC under 6 Del. C. § 18-802 and dissolution of joint venture corporations under 8 Del. C. § 273.
In applying the three-part test articulated above, Vice Chancellor Slights found, based on the pleadings, that GR BURGR was in an unbreakable deadlock due to the extraordinary management dysfunction, with no means to break the deadlock. Given that, judicial dissolution was appropriate. The Court found that GR BURGR was deadlocked because GRUS and Seibel each owned 50% of GR BURGR, each was entitled to appoint one manager, all decisions had to be unanimous and the Operating Agreement provided no mechanism to break the deadlock. Once Seibel was convicted and sentenced for felony tax fraud, both Caesars and GRUS sought to disassociate from him, and when GRUS attempted to comply with Caesars’s demand, Seibel refused. Upon learning that Seibel would not leave GR BURGR, Caesars terminated the Caesars Agreement – which governed the only revenue-producing business GR BURGR had. Based on these undisputed facts, Vice Chancellor Slights held that it was “difficult to imagine how [GR BURGR] could be any more dysfunctional or deadlocked.” The Court also concluded that it was not reasonably conceivable that the deadlock would be broken at some point in the future.
Lastly, the Court found that equity will not prevent a finding of judicial dissolution. Seibel had argued that equity should deny GRUS’s request for judicial dissolution because Gordon Ramsay and GRUS were using dissolution as a tactical maneuver to “usurp a business opportunity” from GR BURGR and Seibel for Ramsay’s own personal gain. The Court disagreed. Vice Chancellor Slights determined that it was Seibel’s conviction for tax fraud that prompted Ramsay and GRUS to seek dissolution, as Seibel failed to allege any prior attempts by Ramsay to “usurp” any business opportunities. Additionally, the Court held that Seibel failed to identify any specific future business opportunity that Ramsay and GRUS were seeking to usurp. It was not enough for Seibel to simply allege “that Ramsay may, at some point in the future, engage in some other burger venture that uses his name and likeness to capitalize on the celebrity and status Ramsay has spent his career building.” In refusing to accept the invocation of equity to prevent judicial dissolution, the Court held that it “would be the antithesis of equitable” to “indefinitely lock Ramsay in a failed joint venture and thereby preclude him from ever engaging in … a restaurant business that exploits Ramsay’s celebrity to sell one of the most popular and beloved food preparations in all of history.”
In the end, this decision highlights the importance of carefully considering both the terms of LLC operating agreements and the character of potential business partners. There is no indication that Ramsay and Seibel were unsophisticated parties. Given that, there presumably were valid reasons for the Operating Agreement to require the two 50% owners, or co-venturers, to act unanimously with no method to break a deadlock – such as neither party being willing to cede that much authority to a third party. Yet when two parties agree to such an operating structure, they must weigh the risks of becoming involved in an intractable deadlock and relying on litigation to resolve the issue. Like most things, there are costs and benefits to choosing to proceed in a certain manner, and this decision illustrates the need to carefully consider those.