An involuntary judicial dissolution is one of the most powerful tools available to a lawyer advising a client seeking a business divorce. Once the client decides to pursue an involuntary judicial dissolution, an attorney’s first question should be: in which court? It is often the case that even if all of the parties are citizens of the same state, those parties formed their entity under the laws of another state. Under those circumstances, can the parties ask their home state court to judicially dissolve an entity formed under the laws of a foreign state?
This issue was recently raised with respect to a business divorce among the owners of the Delaware LLC that owned the Philadelphia Inquirer and Philadelphia Daily News newspapers. Certain members sought judicial dissolution in Pennsylvania state court on the grounds that business’s operations were in Pennsylvania, whereas other owners sought judicial dissolution in Delaware state court on the grounds that the LLC was a creation of Delaware law. Ultimately, the Pennsylvania court declined to exercise jurisdiction, and the Delaware court presided over the proceedings.
Two Illinois Supreme Court cases from 1910 provide that Illinois courts lack the power to dissolve a business entity created under the law of another state and, therefore, they should decline to exercise jurisdiction over a claim for judicial dissolution over a foreign entity. Consequently, if the business at issue is a Delaware corporation or Delaware LLC, it is likely that an action to judicially dissolve that business should be filed in Delaware — even if the business is owned by Illinois citizens and operated in Illinois.
This topic is discussed in considerable detail in an excellent article written by friends Peter B. Ladig and Kyle Evans Gay called Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out? The Business Lawyer; Vol. 70, Fall 2015. Link.