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DE Chancery Court Won't Dismiss Action Seeking Dissolution of a Deadlocked Joint Venture
Unsuccessful 50/50 joint ventures often lead to disputes between the partners and, in some cases, may produce noteworthy judicial decisions. Such is the case with Lola Cars International Limited v. Krohn Racing, LLC, et al. (C.A. No. 4479-VCN (Del. Ch. Nov. 12, 2009), available at http://www.delawarebusinesslitigation.com/), in which the Delaware Court of Chancery recently refused to dismiss claims arising out of a deadlocked joint venture structured as a limited liability company (“LLC”), including a request by one of the members for a judicial dissolution of the LLC pursuant to Section 18-802 of the Delaware Limited Liability Company Act (the “Act”). While courts are generally reluctant to interfere with contractual relationships negotiated by sophisticated parties, the Lola Cars ruling demonstrates that Delaware courts will intercede when participants in a commercial venture are genuinely deadlocked and specific allegations of bad faith are made, even if remedies to address the deadlock are available under the contract.
Background
In March 2007, Lola Cars International Ltd., a company specializing in the manufacture and sale of race car chassis and parts, and Krohn Racing, LLC, a company that operates a “Grand Am” automobile racing team, formed a venture named Proto-Auto, LLC. Proto-Auto was established to manufacture and sell specific “Daytona prototype” race cars. To this end, each party was responsible for distinct tasks: Lola was in charge of evaluating, testing and developing a chassis for the prototype racing car, while Krohn was tasked with purchasing from Proto-Auto and testing two of these vehicles for competition, as well as providing the venture's chief executive officer.
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