Delaware Limited Liability Company Act: New Statutory Constructs

On July 23, 2018, the Delaware legislature amended the Delaware Limited Liability Company Act (“DLLCA”). The majority of the amendments became effective on Aug. 1, 2018. This update introduces a few of the new statutory constructs, with a focus on divisive mergers.

Divisive Mergers
Under the DLLCA, a limited liability company (“LLC”) may now divide into two or more LLCs by adopting a plan of division and filing a Certificate of Division with the Delaware Secretary of State. In accordance with the plan of division, the assets, liabilities, rights, and duties of the original “dividing” LLC are allocated among the newly created “division” LLCs.

A divisive merger could be used to generate a spin-off, sell lines of business, or sell assets, rights and properties, along with related liabilities. After division, the dividing company’s assets and liabilities are allocated to the resulting LLCs as specified in a plan of division. Each asset and liability of the dividing company must be reasonably identifiable and attributable to a resulting LLC, meaning that the identity of the asset or liability can be objectively determined. The plan of division setting forth the specific allocations among the division LLCs may be kept private and need not be filed with the Delaware Secretary of State. Division does not constitute a dissolution of the dividing LLC, so the dividing LLC does not need to wind up its affairs or pay its liabilities and distribute its assets. Therefore, the dividing LLC may survive the division, depending on the plan of division.

The amended DLLCA extends some protections to existing creditors of a dividing LLC. Each division company is jointly and seperately liable for any liabilities that are not allocated in the plan of division or if the division constitutes a fraudulent transfer with respect to such liabilities.

Under the amended DLLCA, allocating assets in a division does not constitute a transfer or assignment. As such, in certain circumstances, transfer taxes may be avoidable when using a divisive merger to effect certain transactions. Potentially, a division could be used to transfer a contract where such contract prohibits assignment of the contract so long as such prohibition fails to include transfers effected by operation of law.

Credit agreements and indentures will need to account for divisive mergers by expressly restricting divisive mergers and/or capturing divisive mergers in other restrictive covenants (e.g. subsidiaries, distributions, transfers of assets and/or liabilities, etc.). In the event that a divisive merger is permitted by a lender, the lender may need to amend the credit facility documents to account for new loan parties and financial and other covenants may need to be reworked to include the new entities. In addition, a lender should require prior notice of a permitted divisive merger in order to have time to create and perfect security interests against assets transferred in a divisive merger and/or to maintain perfection against assets of entities involved in a divisive merger. The lender will also need to review the pro forma financial statements of the LLCs involved in a divisive merger to determine whether a fraudulent transfer issue may exist or whether the lender’s credit risk may substantially increase from the division.

The newly amended DLLCA includes a limited exception for LLCs formed before Aug. 1, 2018. The exception provides that if a written contract, indenture or other agreement entered into prior to Aug. 1, 2018 restricts, conditions or prohibits the consummation of a merger or consolidation by the dividing company with or into another party, or the transfer of assets by the dividing company to another party, then such restriction, condition or prohibition is deemed to apply to a division as if it were a merger, consolidation or transfer of assets, as applicable.

Registered Series/Protected Series
A registered series is formed under DLLCA Section 18-218 and may be registered with the Delaware Secretary of State by filing a Certificate of Registered Series. Registered series were introduced to solve some of the issues connected with existing series. Existing series are not considered “registered organizations” under the Uniform Commercial Code. This proves problematic when perfecting security interests against an existing series’ assets. Additionally, registered series can obtain certificates of good standing and merge with other series of the same LLC, unlike existing series. A registered series can be converted to a protected series by filing a certificate of conversion with the Delaware Secretary of State. Existing series, or series newly filed under Series 18-215(b), are now known as protected series. A protected series can be converted to a registered series by filing a certificate of conversion with the Secretary of State.

Public Benefit Limited Liability Company
A statutory public benefit LLC is a for-profit LLC formed under and subject to the requirements of Subchapter XII of the DLLCA. Like public benefit corporations, public benefit LLCs are formed to create a public benefit and operate in a responsible and sustainable manner. Public benefits include, for example, positive effects of an artistic, cultural, economic, educational, environmental, medical, religious or scientific nature. A public benefit LLC will balance the economic interests of the LLC’s members with public benefit the LLC promotes.

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