Recent Amendments to Delaware’s LLC and LP Acts: Registered Series of LLCs Will Be Permitted Starting in 2019 and LLCs Can Now Divide, Among Other Changes

The Delaware legislature recently adopted amendments to the State’s entity laws that, among other things, allow a Delaware limited liability company (“LLC”) to “divide” itself into new LLCs, and beginning August 1, 2019, allow Delaware LLCs to form “registered series.” Below is an excerpt from a full article describing these recent amendments.

Registered Series of LLCs

The Delaware LLC Act (the “DLLCA”) has permitted the establishment of series of LLC members, managers, interests, and assets since 1996. One of the attractive features of LLC series is that if certain statutory conditions are met, the assets associated with a given series are shielded from claims of creditors against other series of the LLC or against the LLC as a whole.

Yet LLC series have created challenges for anyone trying to situate them within the framework of UCC Article 9. A series established under the current DLLCA does not meet the UCC’s definition of “registered organization” because such a series is not formed or organized “by the filing of a public organic record” with the state. Thus, it is unlikely that a security interest in the assets of a series can be perfected simply by filing a financing statement in Delaware, as would be the case with assets of a Delaware corporation, LLC, or other registered organization. Instead, one may need to file in the state where the series’ place of business or chief executive office is located, treating the series in the same way one would treat a common law partnership.

Amendments to the DLLCA, adopted with a delayed effective date of August 1, 2019, will help resolve the series-perfection issue by enabling Delaware LLCs to form series that will constitute “registered organizations” under UCC Article 9. The amendments distinguish between a “protected series” and a “registered series.” The term “protected series” refers to a shielded series of the type that can currently be established. “Registered series” refers to a series formed by the filing of a certificate of registered series with the Delaware Secretary of State. Since a registered series will accordingly be formed “by the filing of a public organic record” with the state, it will be a registered organization under UCC Article 9, and secured parties will therefore be able to perfect security interests in most types of assets owned by a registered series by filing a financing statement with the Delaware Secretary of State.

The certificate of registered series must provide the name of the LLC forming the registered series and the name of the registered series itself. The name of a registered series must begin with the full name of the LLC, need not include the word “Series,” and must meet the existing requirement of distinctness from the names of other entities or series on the records of the Secretary of State. The amendments will also permit the reservation of registered-series names just as the DLLCA already permits the reservation of LLC names. The registered agent of an LLC will be the registered agent for any registered series formed by the LLC.

A registered series will not necessarily have the asset-shielding characteristics of a protected series. For a registered series to be shielded, it will need to satisfy the same conditions as those currently in place for shielded series, i.e., the records maintained for the series must “account for the assets associated with such series separately from the other assets of the [LLC], or any other series thereof,” plus the LLC’s certificate of formation must provide “[n]otice of the limitation on liabilities” of the series, and the LLC agreement must permit the formation of series. Neither the certificate of formation nor the LLC agreement, however, must refer specifically to registered series or to DLLCA § 18-218 for the foregoing conditions to be met.

In keeping with a registered series’ status as a registered organization, the amendments provide for the filing of a certificate of amendment to amend a certificate of registered series and the filing of a certificate of cancellation to cancel a certificate of registered series after the series has been dissolved and wound up. The Secretary of State will issue—as requested and appropriate—a certificate of good standing for a registered series. The annual Delaware tax on registered series will initially be set at $75 per series and will be due on June 1, the same date when the annual tax payable by the LLC (currently set at $300) is due.

Protected series will be able to convert into registered series of the same LLC and vice versa. Also, two or more registered series of the same LLC will be permitted to merge. No series will be permitted to convert or merge under any other provisions of the DLLCA.

LLC Division

The amendments make possible for the first time the “division” of a Delaware LLC into multiple Delaware LLCs and the allocation of assets and liabilities among such LLCs without causing thereby a transfer or distribution for purposes of Delaware law. According to the terminology used in new DLLCA § 18-217, the LLC effecting the division is the “dividing company” and will be the “surviving company” if it survives the division. The LLC or LLCs created in the division are “resulting companies” and, together with the surviving company (if any), are also “division companies.”

To divide, an LLC (the dividing company) must first adopt a plan of division. By default, the plan must be approved by a majority in interest of the dividing company’s members. The plan must set forth how interests in the dividing company will be dealt with in the division, how the assets and liabilities of the dividing company will be allocated among the division companies, the names of the surviving company and the resulting companies, and the name and address of a “division contact.” The division contact is an individual residing in Delaware or an entity formed under Delaware law that, for six years following the division, will provide to any requesting creditor of the dividing company the name and address of the division company to which the creditor’s claim was allocated under the plan of division. If the dividing company will be a surviving company, the plan of division may also effect any amendment to the operating agreement of the dividing company, unless its operating agreement prohibits an amendment specifically in connection with a division, merger, or consolidation.

The division is effectuated by filing with the Delaware Secretary of State a certificate of division containing, among other things, the name of the dividing company, whether the dividing company is a surviving company, the name of each division company, and the name and address of the division contact. When the certificate of division is filed, a certificate of formation must also be filed for each resulting company. The operating agreement of each resulting company becomes effective upon the effectiveness of the division.

The effectiveness of the division causes the assets and liabilities of the dividing company to be allocated among the division companies pursuant to the plan of division. The allocation does not constitute a transfer or a distribution for purposes of Delaware law. Likewise, the division does not by default constitute a dissolution of the dividing company even if it is not a surviving company. Instead, when the dividing company is not a surviving company, its existence will merely “cease” upon the division.

In addition to the requirement of a division contact, a number of provisions in Section 18-217 should help protect creditors of a dividing company. A division “shall not be deemed to affect the personal liability of any person incurred prior to such division with respect to matters arising prior to such division[.]” Also, if the division is judicially found to constitute a fraudulent transfer, then each division company, including by definition the surviving company (if any), “shall be jointly and severally liable on account of such fraudulent transfer notwithstanding the allocations made in the plan of division[.]” Finally, if any liabilities of the dividing company are not allocated under the plan of division, they will be the joint and several liabilities of all the division companies, again including by definition the surviving company (if any).

To read more about recent amendments to Delaware’s entity laws, view the entire here.

Norman M. Powell (Temple Law Adjunct Professor) is a Partner at Young Conaway; John J. Paschetto is a Partner and Justin P. Duda is an Associate at Young Conaway. They advise parties and lead counsel in multijurisdictional mergers and acquisitions, restructuring, and financing transactions involving Delaware entities. They handle complex details relating to the formation and governance of Delaware entities, authorization and action, and the granting and perfection of security interests.