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Notable Recent Amendments to the Delaware General Corporation Law and Delaware Limited Liability Company Act

September 27, 2019 |So far in 2019, Delaware has made several amendments to the General Corporation Law (“DGCL”) and Limited Liability Company Act (“LLC Act”).  Significant changes are summarized below.

Electronic Documents and Signatures 

New DGCL § 116(a) considers an electronic document and signature as equivalent to a written document and signature, and any transaction governed by the DGCL or a company’s governing documents may be signed and delivered electronically. DocuSign is one example of an electronic signature platform that is now accepted. However, this change does not supersede any applicable law that requires a different form of documentation or signature. § 116(b) provides several examples of the exceptions to this new rule, such as:

  • DGCL § 103(h), which governs the documents to be filed with or submitted to the Delaware Secretary of State;
  • DGCL § 280, which sets forth procedures for giving notice to claimants and other matters in connect with long-form dissolution; and
  • DGCL Subchapter SVI, which deals with foreign corporations including the requirements of foreign corporations to qualify to do business in the State of Delaware.

Mandated Electronic Notice and Consent

  • DGCL § 232(a) establishes that stockholders by default consent to electronic notices. Stockholders must affirmatively opt out if they wish to receive paper form notices.
  • DGCL § 228(d) has been amended to eliminate the requirement that stockholder consents delivered electronically must be delivered physically in paper form.
  • DGCL § 262 has been revised to enable companies to deliver appraisal notices to stockholders by electronic means, such as email. Also, stockholder demands for appraisal are now allowed to be sent to the corporation electronically, but only if the corporation has expressly designated an email or other location where those demands would be sent.

New Entity – Registered Series LLC

As of August 1, 2019, Delaware added a new type of series LLC: a “registered series” (§ 18-215 & § 18-218). This is in addition to the previously authorized “protected series” (a protected series LLC permits division of investments into separate subsections or series that may, at the discretion of the members involved, have different members, managers, assets, and interests than other “series”).  By doing so, an LLC can shield different assets from potential liability, as claims against the assets of one series cannot be extended to the assets of any other series.

Prior to the amendment, a series LLC was not deemed a “registered organization” or “person” under the UCC. This made perfecting security interests against the assets of a series LLC difficult. As a result, Delaware amended its statute to create the new “registered series” LLC form.  It is very similar to a protected series, but a registered series will now meet the criteria of a “registered organization” under Article 1 of the UCC.

A registered series must begin its name with the same name as the LLC, but it does not have to include the word “series” in its name. The series name must also be different enough from the other series that there will be no cause for confusion. Also, unlike a protected series, a registered series may obtain a Certificate of Good Standing from the Delaware Secretary of State. The new series LLC may be subject to taxes as a separate entity, as it may have several distinguishable qualities from other series.

A new Delaware LLC can now file a Certificate of Registered Series with the Secretary of State’s office at the time of organization.  Existing LLCs may file the Certificate of Registered Series, but it will also need to file a Certificate of Amendment to their Articles of Organization to allow for the creation of a series. Delaware has amended the statute to be flexible, so an LLC may also convert from a protected series LLC to a registered series LLC, and vice versa.

Communications Contact

The DGCL and the LLC Act have been amended to require registered agents to keep a “communications contact” on file (typically an officer of the company).  This change is intended to provide an efficient contact person in case of emergency or investigation who can then provide necessary information to an inquiring entity, such as ownership information. Identity of the communications contact will not be publicly available but is rather for state governmental officials.

CATSS Act and Public Benefit LLCs Adopted in 2018

Though not this year, in late 2018, Delaware passed the Certification of Adoption of Sustainability and Transparency Standards Act (H.B. 310, CATSS Act). This bill was the first of its kind, allowing a Delaware entity to be certified as a “reporting entity” by the Secretary of State and can then publicize that they are committed to sustainability and transparency. Under the CATSS Act, any sustainability standards that an entity adopts must be developed by a third party and the third party used to assess performance. Third-party standards used by the entity may be issued by the government, a relevant non-governmental organization, or an independent consultant chosen by the entity.

Also in the last half of 2018, Delaware amended the LLC Act to permit public benefit LLCs Public benefit LLCs are very similar to public benefit corporations, and the amendment to § 18-1201-18-1208 of the LLC Act allows an LLC to explicitly state a public benefit in its Certificate of Formation.  Time will tell how widely this will be adopted, as a Delaware LLC could already state any sort of organizational purpose in its operating agreement.

LLC Divisive Mergers Adopted in 2018

Effective August 1, 2018, Delaware has adopted § 18-217 of the LLC Act, which allows for divisive mergers (Pennsylvania and Texas were the first states to adopt such statutes). A divisive merger is a transaction in in which one LLC can divide by statute into two or more separate entities. The dividing entity is not required to dissolve such as in a typical merger, and it can continue as a surviving entity at the option of the parties involved.

Since the dividing entity is not required to dissolve by statute, this tool can be very helpful for asset sales. Assets can be specifically transferred to the resulting LLC, the resulting LLC can be sold, and the dividing LLC remains intact.

There are, however, several issues that the dividing entity must consider. For example, if there are active lending agreements for the dividing entity, it is important to update or amend those agreements after a divisive merger takes place. Further, if the dividing entity survives, it must update its operating agreement to reflect any changes that result from the divisive merger.

For more information, please contact Geoff Morgan or Jessica Fairchild.

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