In | On July 25, 2018
In its last 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 in July 2018. The majority of the amendments become effective on August 1, 2018, with certain amendments to the DLLCA (where noted below) becoming effective on August 1, 2019.
The amendments include a number of substantive, technical and clarifying changes. In the case of the DGCL, they include most notably changes that clarify and confirm the circumstances in which corporations may use Section 204 to ratify defective corporate acts and changes that apply the “market out exception” to the availability of appraisal rights in connection with an exchange offer followed by a back-end merger consummated without a vote of stockholders. In the case of the DLLCA, they include most notably changes that permit “divisions” of a limited liability company, the formation of “statutory public benefit limited liability companies”, and the formation of “registered series” of a limited liability company, as well as granting the Delaware Court of Chancery authority to cancel the certificate of formation of any limited liability company for abuse or misuse. Details regarding the various amendments are as follows.
Amendments to the DGCL
Ratification (DGCL Section 204). Adopted in 2014, Section 204 (and related Section 205) of the DGCL provide a mechanism for a corporation to ratify defective corporate acts or seek relief from the Delaware Court of Chancery to validate a corporate act under certain circumstances. These provisions have already proven to be useful tools for addressing a wide variety of imperfections in many corporations’ corporate records. Amendments made to Section 204 in the 2018 legislative cycle should further that end, and include changes that:
- Confirm that Section 204 is available for use in ratifying defective corporate acts even where no valid stock is outstanding;
- Clarify that, where the defective corporate act involved the establishment of a record date, the notice required under Section 204 to be given to stockholders as of the time of the defective corporate act may instead be given to the stockholders as of the record time for the defective corporate act;
- Allow public companies to give the stockholder notice required under Section 204 through disclosure in a document publicly filed with the Securities and Exchange Commission;
- In light of recent case law, clarify and confirm that any act or transaction that a corporation takes that was void or voidable due to “failure of authorization” may be ratified under Section 204 unless the act or transaction is of a type expressly excluded by the DGCL from being within the power of a Delaware corporation; and
- Clarify that the failure of an act or transaction to be approved in compliance with the disclosure set forth in a proxy statement or consent solicitation statement may constitute a failure of authorization.
Appraisal (Section 262). Section 262 of the DGCL sets out the statutory appraisal process applicable to mergers and consolidations of Delaware corporations. As previously drafted, it provided a “market out exception” under which holders of shares of stock of target corporations that are listed on a national securities exchange or held of record by more than 2,000 holders are (with certain exceptions) not entitled to appraisal rights, provided that such holders are only required to accept, in exchange for such stock, certain stock or cash in lieu of fractional shares. The amendments to Section 262 extend the “market out exception” to “intermediate-form” mergers pursuant to Section 251(h) (a stock-for-stock exchange followed by a merger), thus aligning the treatment of “intermediate-form” mergers with the treatment of “long-form” mergers with respect to the availability of appraisal rights.
The amendments to Section 262 also include conforming technical changes which clarify that, in the case of an “intermediate-form” merger approved pursuant to Section 251(h), since no shares are “voted” in favor of the merger or consolidation, the statement required to be furnished by the surviving corporation to the requesting holder must (rather than setting forth the number of shares not voted for the merger) set forth the aggregate number of shares that were the subject of, but were not tendered into and accepted for purchase or exchange in, such tender or exchange offer.
Other Amendments. Several other revisions were made in order to conform with the other amendments described above as well as the revisions to the DLLCA. For instance, in light of the changes made to the DLLCA regarding registered series, Section 102 of the DGCL was amended (effective August 1, 2019) to require that a corporation’s name be distinguishable on the records of the Secretary of State from that of any registered series of a limited liability company. Section 114 of the DGCL was amended to allow nonstock corporations to use the provisions of Sections 104 and 105 of the DGCL in order to ratify defective corporate acts. Section 284 of the DGCL was amended to clarify certain aspects of the Attorney General’s authority to move for revocation or forfeiture of a corporation for abuse or misuse.
Amendments to the DLLCA
Cancellation for Abuse or Misuse (DLLCA Section 18-112). New Section 12-112 of the DLLCA provides that, upon motion by the Attorney General, the Delaware Court of Chancery may cancel the certificate or formation of any domestic limited liability company for abuse or misuse of its limited liability company powers, privileges or existence. This Section was added to provide a process parallel to that of Section 284 of the DGCL for terminating a company for perceived abuses.
Division (DLLCA Section 18-217). New Section 18-217 of the DLLCA enables a limited liability company to divide into two or more limited liability companies with the dividing company continuing or terminating its existence, as the case may be. If the limited liability company agreement of the dividing company does not specify the manner of adopting a plan of division and does not prohibit a division of the company, the plan of division must be adopted in the same manner provided in the agreement for authorizing a merger or consolidation or, if the agreement does not so provide, then by members owning more than a 50 percent interest.
The debts and liabilities of the dividing company are allocated among the resulting companies (referred to in the statute as “division companies”) in the manner specified in the plan of division, and, after the division goes into effect, no other division company is responsible for those debts and liabilities so long as the plan of division does not constitute a fraudulent transfer. The certificate of division filed with the Delaware Secretary of State must name a “division contact” who shall, upon request of any creditor (for six years after the division), provide such creditor with the name and business address of the company to which the claim of such creditor was allocated pursuant to the plan of division.
The division process contemplated in Section 18-217 provides limited liability companies with another, more direct, tool for effecting reorganizations that might otherwise have been effected by a spin-off structured as a sale of assets to a subsidiary and a distribution of the equity of such subsidiary.
Formation of Registered Series (DLLCA Section 18-218). New Section 18-218 of the DLLCA authorizes the formation of a “registered series”. Registered series are associations formed by the filing of a certificate of registered series and, therefore, have the attributes required to be “registered organizations” under the Uniform Commercial Code. Registered series also have the same rights and powers and the same inter-series limitation on liability as series established under Section 18-215(b), with Section 18-215(b) series having been redubbed as “protected series” under the amendments. New Section 18-218 becomes effective on August 1, 2019, to provide the Delaware Secretary of State’s office with the time necessary to prepare for the related new certificates and filings.
The formation of a registered series by filing of a certificate of registered series may prove beneficial to some limited liability companies in structuring financing transactions that depend on creation and perfection of security interests in the assets held by the series.
Statutory Public Benefit Limited Liability Companies (DLLCA Sections 18-1201 to 18-1207). New Subchapter XII of the DLLCA allows for the formation of statutory public benefit LLCs which, like public benefit corporations, are for-profit but are intended to produce a public benefit and to operate in a responsible and sustainable manner.
Subchapter XII is an elective regime. If an LLC elects to become a statutory public benefit limited liability company, then it must comply with the requirements of Subchapter XII, which may not be altered by the limited liability company agreement. To elect into Subchapter XII, the certificate of formation of the LLC must state within its heading that the LLC is a statutory public benefit limited liability company, and must set forth one or more specific public benefits to be promoted by the limited liability company.
An LLC that has elected to be governed by Subchapter XII shall be managed in a manner that balances the members’ pecuniary interests, the best interests of those materially affected by the LLC’s conduct, and the public benefit set forth in the certificate of formation. The member and managers of the LLC do not, by virtue of Subchapter XII, owe any duty to any person on account of such person’s interest in the public benefit sought by the LLC. And, in managing the required balance, the members and managers are deemed to satisfy their fiduciary duties to members and to the LLC if decisions are both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
The statutory public benefit LLC must, no less than biennially, provide its members with a statement as to the LLC’s promotion of the public benefit set forth in its certificate of formation and as to the best interests of those materially affected by the LLC’s conduct.
In some ways Article XII is superfluous, in that the DLLCA is a permissive statute, and, unlike a Delaware corporation, a balancing of interests between members and others could have been provided for in the LLC’s limited liability company agreement without express statutory authority. Section 18-1208 makes clear that such non-statutory public benefit arrangements remain permissible. But some limited liability companies may choose to take the further step of complying with Article XII and thus becoming a statutory public benefit limited liability company so that they can better position themselves to obtain third-party certifications of their public benefit nature.
Other Amendments. While voluminous, the remainder of the amendments to the DLLCA adopted by the Delaware legislature in its last session consist largely of conforming, clarifying and enabling amendments to other Sections of the DLLCA that relate to the amendments described above. Among those changes are new Section 18-219 that enables a protected series of an LLC to convert to a registered series of such LLC, Section 18-220 that enables a registered series of an LLC to convert to a protected series of such LLC, and Section 18-221 that provides that registered series of an LLC may merge or consolidate with one another; these amendments all become effective on August 1, 2019. Changes were also made to certain Sections in order to provide specific statutory authority for limited liability companies to use networks of electronic databases (examples of which are described currently as “distributed ledgers” or a “blockchain”) for the creation and maintenance of limited liability company records and for certain “electronic transmissions”.
Amendments to DRULPA
In light of the changes made to the DLLCA regarding registered series, Section 17-102 of DRULPA was amended (effective August 1, 2019) to require that a limited partnership’s name be distinguishable on the records of the Secretary of State from that of any registered series of a limited liability company. Changes were also made to certain Sections in order to provide specific statutory authority for limited partnerships to use networks of electronic databases (examples of which are described currently as “distributed ledgers” or a “blockchain”) for the creation and maintenance of limited partnership records and for certain “electronic transmissions”. A clarifying amendment was also made to Section 17-213 of DRULPA with respect to the timing of payment of the fee associated with a certificate of correction filing.
Amendments to DRUPA
In light of the changes made to the DLLCA regarding registered series, Section 15-108 of DRUPA was amended (effective August 1, 2019) to require that a partnership’s name be distinguishable on the records of the Secretary of State from that of any registered series of a limited liability company.
Copyright © 2018 Connolly Gallagher LLP. These materials have been prepared solely for informational and educational purposes, do not create an attorney-client relationship with the author(s) or Connolly Gallagher LLP, and should not be used as a substitute for legal counseling in specific situations. These materials reflect only the personal views of the author(s) and are not necessarily the views of Connolly Gallagher LLP or its clients.