2021 Amendments to Delaware’s General Corporation Law and Alternative Entity Statutes

In its current session, the Delaware legislature passed a number of amendments to the Delaware General Corporation Law (the “DGCL”), the Delaware Limited Liability Company Act (the “DLLCA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) and the Delaware Revised Uniform Partnership Act (“DRUPA” and, together with the DLLCA and DRULPA, the “alternative entity statutes”). Delaware Governor John Carney signed these bills into law on June 30, 2021. The amendments become effective on August 1, 2021.

The amendments include a number of substantive, technical and clarifying changes. Most notably, they include changes to the alternative entity statutes regarding the ratification of void or voidable acts, access to books and records, and the delegation of management powers. There was only one change to the DGCL this year. Details regarding the various amendments are as follows.

Amendments to the DGCL
Voting of Stock Held by Corporation (DGCL Section 160(c)). Section 160 of the DGCL addresses a corporation’s powers respecting ownership, voting, etc. of its own stock. Subsection 160(c) previously provided that shares of a corporation’s stock may not be voted or counted for quorum purposes if they are owned by the corporation itself or directly or indirectly by the corporation’s majority-owned subsidiary corporation. Subsection 160(c) has been amended to add that the same rule applies to shares of stock owned by any other form of entity the majority of the voting power of which is owned directly or indirectly by the corporation or if such other entity is otherwise controlled directly or indirectly by the corporation. The amendment is meant for clarification and should not be construed to create any negative implication with respect to the inclusion or exclusion of non-corporate entities in connection with any other section of the DGCL.

Amendments to the DLLCA
Nature of Business Permitted; Powers (DLLCA Section 18-106). Section 18-106 was amended to add a new Subsection 18-106(e) providing that any act or transaction that may be taken by or in respect of a limited liability company (“LLC”) that is void or voidable when taken may be ratified by the members, managers or other persons whose approval would be required under the LLC agreement (i) for such act or transaction to be validly taken, or (ii) to amend the LLC agreement in a manner that would permit such act or transaction to be validly taken. Any act or transaction so ratified shall be deemed validly taken at the time of such act or transaction. The new subsection sets in place a process for members, managers or other persons claiming to be substantially and adversely affected to challenge the ratification in the Court of Chancery. The new subsection is intended to provide a safe-harbor procedure for ratifying acts or transactions that are void or voidable and waiving failures to comply with requirements of a LLC agreement that make such acts and transactions void or voidable, and is intended to provide a rule different from certain recent Delaware case law.

Access to and Confidentiality of Information; Records (DLLCA Section 18-305). Section 18-305 addresses the rights of members of a LLC to access the books and records of the LLC. The Section was amended to provide that, when a member is entitled to obtain information for a stated purpose (whether pursuant to Section 18-305 or a LLC agreement), the member’s right shall be to obtain such information as is necessary and essential to achieving that purpose, unless such right has been expanded or restricted in the LLC agreement. The revisions are intended to change current law to the extent current law is that the “necessary and essential” test does not apply by default to (i) a member’s right under Section 18-305(a) of the Act to obtain information from a LLC for a purpose reasonably related to the member’s interest as a member, or (ii) a member’s right under a LLC agreement to obtain information from a LLC for a stated purpose. The revisions bring the section more in line with the law applicable to the books and records of Delaware corporations.  Delegation of Rights and Powers to Manage (DLLCA Section 18-407). Section 18-407 was amended to provide that a member or manager may delegate any of its rights, powers or duties irrespective of whether the member or manager has a conflict of interest with respect to the matter as to which such rights, powers or duties are being delegated, and that the person or persons to whom any such rights, powers or duties are being delegated shall not be deemed conflicted solely by reason of the conflict of interest of the member or manager. The amendment is intended to vary from recent case law providing that a conflicted principal is legally disabled from delegating authority over the subject matter as to which the principal is conflicted even to an independent delegatee.

Law Applicable to Statutory Public Benefit Limited Liability Companies; How Formed (DLLCA Section 18-1201). Section 18-1201 was amended to provide for the manner in which a LLC may become a statutory public benefit LLC, by inserting new language indicating that, if a LLC is not formed initially as a statutory public benefit LLC, it may become a statutory public benefit LLC in the manner specified in its LLC agreement or by amending its LLC agreement and certificate of formation to comply with the requirements of the DLLCA sections governing statutory public benefit LLCs.

Statutory Public Benefit Limited Liability Company Defined; Contents of Certificate of Formation and Limited Liability Company Agreement (DLLCA Section 18-1202). Subsection 18-1202(a) was amended to provide that a LLC agreement of a statutory public benefit LLC must state that the LLC is a statutory public benefit LLC and must set forth the specific public benefit or benefits to be promoted by the company. The Subsection was also amended to provide that, in the event of any inconsistency between the public benefit(s) as set forth in the company’s LLC agreement and its certificate of formation, the LLC agreement controls as among the members, the managers and other persons who are party to or otherwise bound by the liability company agreement. The Subsection was further amended to provide that any provision of a LLC agreement or certificate of formation of a statutory public benefit LLC is not effective to the extent that it is inconsistent with the requirements of the DLLCA sections governing statutory public benefit LLCs, and to require that the manager (or member, if there is no manager) of a statutory public benefit LLC must amend the certificate of formation if such manager (or member, if there is no manager) becomes aware that the specific public benefit or benefits to be promoted by the LLC as set forth in its LLC agreement are inaccurately set forth in its certificate of formation.

Other Amendments. Several other clarifying, confirming and technical changes were made to the DLLCA.

Amendments to DRULPA
Sections 17-106, 17-305, 17-403, 17-1201 and 17-1202 of DRULPA were amended in a manner parallel to the amendments discussed above to Sections 18-106, 18-305, 18-407, 18-1201 and 18-1202 of the DLLCA. Several other clarifying, confirming and technical changes were made to DRULPA.

Amendments to DRUPA
Sections 15-202, 15-401 and 15-403 of DRUPA were amended in a manner parallel to the amendments discussed above to Sections 18-106, 18-305 and 18-407 of the DLLCA. In addition, several other clarifying, confirming and technical changes were made to DRUPA.