POWER OF INTELLIGENCE

Insight Center: Publications

Amendments to Delaware Alternative Entity Acts Enacted

Client Alert

Authors: Matthew M. Greenberg, Christopher B. Chuff and Taylor B. Bartholomew

8/01/2018
Amendments to Delaware Alternative Entity Acts Enacted

On August 1, several amendments to the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101, et seq. (DRULPA), and the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et seq. (DLLCA) (collectively, the Alternative Entity Acts) were enacted. The legislation made several changes to the Alternative Entity Acts, including: (1) permitting the division of limited liability companies into two or more limited liability companies; (2) the creation of registered series; (3) permitting formation of statutory public benefit limited liability companies; and (4) permitting the use of blockchain technology and distributed ledgers for certain tasks.

Division of a Limited Liability Company

New DLLCA section 18-217 permits a Delaware LLC to divide into one or more divisions. To do so, the original LLC must adopt a plan of division, which must identify the terms and conditions of the division; allocate assets, property, rights, debts, liabilities and duties amongst the division companies; and provide the name of each resulting division company and — if the original LLC is to survive the division — the name of the surviving LLC. The LLC must then file a certificate of division with the secretary of state (which also acts as a certificate of cancelation if the original LLC is not surviving the division).

Following the division, in the absence of a fraudulent transfer, each division company will be liable only for the debts and liabilities that are specifically allocated to it in the plan of division. If the allocation is deemed to be a fraudulent transfer, each division will be held jointly and severally liable for the debts and liabilities of the original LLC. Further, as to any debts and liabilities that are not allocated by the plan of division, each division will be jointly and severally liable for those debts and liabilities.

New LLCs formed after August 1, 2018 will be able to utilize this section. LLCs formed before that date will be governed by this section, provided that they are not party to any contract, indenture or other agreement that restricts or prohibits mergers, consolidation or transfer of assets. In the event that they are, the division shall be treated and need to comply as if it were a merger, consolidation or transfer of assets.

Creation of a Registered Series

In order to facilitate secured financing transactions through Delaware LLCs, the DLLCA has been amended to permit the creation of a registered series, which is governed by new section 18-218. To form a registered series, the LLC’s certificate of formation must contain a notice of the limitation on liabilities of the registered series, and a certificate of registered series must be filed with the Delaware secretary of state. This is an important development because, before these amendments, it was unclear under Delaware law how to attach a security interest to a series of membership interests.

As a result of these amendments, a registered series will qualify as a registered organization under the Uniform Commercial Code (UCC) and will be subject to the provisions of the UCC regarding security interests. Further, UCC filings will be filed in of Delaware, and registered series will be able to obtain certificates of good standing from the secretary of state. Registered series will also be subject to all of the same powers and restrictions as previously created series. Those series previously created under DLLCA section 18-215 are now known as “protected series.” Protected series will have the ability to convert into registered series, and registered series will have the ability to convert into protected series. The amendments do not otherwise alter the features of protected series. This amendment will not become effective until August 1, 2019.

Creation of a Public Benefit LLC

The amendments to the DLLCA also provide for the creation of statutory public benefit LLCs under new subchapter XII. Statutory public benefit LLCs are for-profit LLCs intended to produce a public benefit and operate in a responsible and sustainable manner. To form a statutory public benefit LLC, the entity must file a certificate of formation stating its intention to form a statutory public benefit LLC and the public benefit or benefits that it intends to promote. A public benefit may either create positive effects or reduce negative effects on things of an “artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.”

Members or managers who direct the business of a statutory public benefit LLC must balance (1) the interests of the members of the LLC; (2) the interests of those affected by its conduct; and (3) the public benefit(s) identified in the certificate of formation. Finally, this type of LLC must provide, no less than biennially, to its members a statement containing information about the specific promotion of public benefit(s) identified in the certificate of formation, including its objectives, its standards to measure progress, objective information regarding its success based on those standards, and an assessment of the entity’s success in meeting its objective(s).

New subchapter XII also sets forth the limitations on a statutory public benefit LLC’s ability to cease being a public benefit LLC or adopt amendments to its certificate of formation or consummate mergers, consolidations or divisions to the extent the amendments or transactions would abandon the LLC’s stated public benefit. The new subchapter also establishes a means to enforce the promotion of the public benefits identified in the statutory public benefit LLC’s certificate of formation.

Blockchain Technology and Distributed Ledgers

A number of sections of the Alternative Entity Acts have also been amended to permit the use of networks of electronic databases, including both blockchain-based ledgers and distributed ledgers. Pursuant to these amendments, using these networks is now permissible for (1) communications with registered agents; (2) written consents in lieu of meetings of limited and general partners (under DRULPA) and members and managers of LLCs (under DLLCA); and (3) maintenance of entity records.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

Data protection laws have changed, so we have revised our Privacy Policy.

CLOSE