A recent California appellate decision highlights the disparity between the "default" rules of the
Corporations Code dealing with the involuntary (or judicial) dissolution of a corporation as
opposed to a limited liability company.

In Kennedy v. Kennedy, 235 Cal. App. 4th 1474 (2015), Brian and Drake Kennedy each owned
a 50% percentage interest in four California corporations and one California limited liability
company. Drake sued Brian, seeking among other relief, involuntary dissolution of the entities.

Both the corporate and limited liability company statutes provide that in an action for involuntary
dissolution, the defendant can avoid the dissolution by purchasing the interest of the plaintiff, with
the purchase price to be determined by a court-appointed appraiser.

In response to the lawsuit, among other things Brian moved to avoid the involuntary dissolution by
purchasing Drake's interest in the entities as provided by the statutory framework. In an attempt to
avoid the buy-out, Drake then dismissed with prejudice his action for involuntary dissolution of the

The issue on appeal was whether Brian's statutory buy-out right survived Drake's dismissal of his
action for involuntary dissolution.

The Court determined that the answer to the question under the now-operative statutes depends on
whether the entity at issue is a corporation or a limited liability company. Specifically, there is no
language in the statute applicable to corporations granting a buy-out right independent of a pending
involuntary dissolution action. Therefore, in the case of the corporations, once Drake's involuntary
dissolution action was dismissed, any buy-out right dissipated. However, in the case of the limited
liability companies, the new statute applicable to all limited liability companies as of January 1, 2014,
contains language which specifically states that the statutory buy-out process survives once an action
for involuntary dissolution is brought, even if it is subsequently dismissed.[1]

The case highlights the disparity in results between the "default" rules of the Corporations Code
applicable to corporations and limited liability companies on this important issue. Often, business
owners do not necessarily put much thought into the choice of a business entity (corporation or limited
liability company), yet that choice can have important and unintended consequences. Business owners
can minimize these consequences by entering into buy-sell agreements between or among themselves
in advance of the onset of any problems, which address these and other important issues.

[1] In the Kennedy case, the Court did not apply this new statute because the action was pending under
the  old law applicable to limited liability companies which did not contain this language.