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Delaware Amends Law Regarding Division and Formation of Limited Liability Companies

Delaware has signed into law several amendments to the Delaware Limited Liability Company Act that provide for, among other things,  the division of a limited liability company into two or more separate LLCs, and  the formation of registered series LLCs. The amendments became effective August 1, 2018, except for the amendments regarding registered series LLCs, which will become effective August 1, 2019.

Division of Limited Liability Companies

Pursuant to the amendments, a single LLC may divide itself, and allocate its assets and its liabilities into two or more LLCs, by adopting a plan of division identifying the terms and conditions of the division and filing a certificate of division with the secretary of state. Lenders should note that unless the division results in a fraudulent transfer under applicable law, each division company is responsible only for the debts and liabilities specifically allocated to it under the plan of division. If, however, the division of assets is determined to have resulted in a fraudulent transfer, all division companies will remain liable for the obligations. This may be a difficult standard for a lender to prove.

The plan of division is not filed with the secretary of state, but creditors may follow their claims from the dividing LLC to the resulting LLCs by contacting the division contact, who must be named in the certificate. The division contact must keep the plan of division for six years following the division and must provide any creditor with the name and address of the resulting companies to which the creditor’s claim was allocated.

If an LLC formed prior to August 1, 2018, is party to an agreement entered into prior to August 1, 2018, and the agreement restricts, conditions or prohibits mergers, consolidations or transfers of assets by the LLC, the same restrictions will apply to any attempted division by the LLC. As of August 1, 2018, parties entering into new agreements or amending existing agreements and wishing to restrict LLC divisions must specifically provide for this restriction. Lenders should review existing agreements and form documents, and update all relevant definitions, covenants and non-assignment provisions to treat divisions and allocations of assets as transfers restricted under the agreements. Whenever possible, lenders should also require borrowers, pledgers and guarantors to amend their operating agreements to prohibit divisions so that any division by the LLC would be void, not just a breach of contract. 

Registered Series Limited Liability Companies

The amendments permit creation of registered series LLCs, a new type of series LLC that qualifies as a registered organization under the Uniform Commercial Code (which clarifies the rules for perfecting a security interest in registered series assets). Registered series LLCs can also obtain good-standing certificates. Series LLCs can still be formed under Section 18-215 of the DLLCA, as they were prior to the amendments. These series LLCs are now known as “protected series” LLCs and may convert to “registered series” LLCs at any time (and vice versa). Unlike protected series, registered series can merge into one or more registered series of the same LLC, facilitating the combination of assets and liabilities of two registered series. 

Despite the new amendments, it remains unclear whether and to what extent the separateness of series will be respected by courts outside of Delaware, including in the context of bankruptcy. Ideally, the series structure allows for segregation of the assets and liabilities of each series, such that the liabilities and other contractual obligations of any given series may be enforced only against the assets of that particular series, and not against the assets of any other series or the parent LLC. If a bankruptcy court decides not to apply Delaware law, however, it could decide to consolidate the assets and liabilities of separate series, and any series would be liable for the debts of all other series and the parent LLC. 

Additional Resources

This Finance Law Alert is intended only as a brief overview of the major amendments that may impact lending transactions. For more information about these and the other amendments not discussed here, please contact any of the finance attorneys at Loeb.