Default Provisions of the Delaware LLC Act

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com
http://www.delcorp.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. 

The Delaware LLC Act contains numerous default provisions which are intended to provide significant terms to a company agreement unless the drafter, by the terms of the agreement, modifies the default terms. Last year the Delaware Court of Chancery wrote in a decision that these default provisions are incorporated into every company agreement unless by the terms of the agreement they have been modified. It is useful to know what default provisions are being incorporated into an agreement as you draft. I have created the attached file to aid drafters.

Delaware LLC Act Default Provisions

DISCLAIMER: While I believe that the listed provisions are inclusive, it is your responsibility as the drafter to carefully review the Delaware LLC Act yourself to reach your own conclusion as the the provisions of the Act which you believe provide default provisions and which you believe should be modified for your agreement.

2010 Delaware General Corporation Law (DGCL) Amendments Adopted

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com
http://www.delcorp.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. 

On June 10, 2010, Delaware’s Governor signed into law the 2010 Amendments to the DGCL . the Bill HB 375 2010 DGCL Amendments as introduced was amended once House Amendment. The new Amendments become effective on August 2, 2010 generally, however Sections 16-17 of the Bill, as amended, will be effective as to transactions consummated pursuant to agreements entered into after August 1, 2010.

The DGCL Amendments were largely technical amendments. Provisions were added at the request of the Secretary of State to deal with issues in its office dealing with service of process, a clarification that in a merger the certificate of incorporation of the surviving corporation may be amended or restated in its entirety and that the “good standing” certificate filed in connection with a foreign qualification must have been issued within 6 months of the filing.

A major feature of the Amendments is the corporate half of the LLC amendments permitting short form mergers between a LLC parent and a corporate subsidiary.

Sections 1-3 and 16-17 amend Sections 104, 111(a)(6), 114(b)(2), 262(b)(3) and 262(d)(2) to reflect the addition of the new short form LLC/corporate merger Section 267.

Section 4 clarifies that both domestic and qualified foreign corporations must have a Delaware registered agent.

Section 5 amends Section 145(d) to clarify that the determination to indemnify must be made by the specified decision making bodies.

Section 5 amends Section 145(e), The first sentence was amended to reflect that it applies to current officers and directors of the corporation and not to other persons seeking indemnification and further clarifies that advancements may be given to persons serving in an official capacity at another entity may be indemnified:

(e) Expenses (including attorneys‘’ fees) incurred by an officer or director of the corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys’’ fees) incurred by former directors and officers or other employees and agents of the corporation or by persons serving at the request of the corporation as directors, officers, employees or agents of another corporation, partnership, joint venture, trust or other enterprise may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.

Section 7 amends Section 242(b) to clarify that the decision to include a copy or a summary of a proposed amendment to the Certificate in a notice of stockholders meeting need not be approved by the Board.

Sections 8, 10-11, 14, 18 and 20 amend Sections 251(b)(3), 251(c)(4), 252(c)(4), 254(d)(4), 263(c)(4) and 264(c)(4) to clarify that the Certificate of the surviving corporation in a merger may be amended or restated in its entirety.

Section 9 is similar to Section 7.

Sections 12, 15, 19, 21-22, 27, and 30-35 amend Sections 252(d), 256(d), 263(d), 264(d), 266(c)(6), 321(b), 376(b), 351(c), 382(a), 382(c) and 390(b)(5) so as to permit service upon the Secretary of State by electronic means pursuant to rules to be adopted by the Secretary and to provide that notice of such service by letter sent by mail or a courier service that includes a record of mailing, delivery and the signature of the recipient.

(d) If the corporation surviving or resulting from the merger or consolidation is to be governed by the laws of the District of Columbia or any state or jurisdiction other than this State, it shall agree that it may be served with process in this State in any proceeding for enforcement of any obligation of any constituent corporation of this State, as well as for enforcement of any obligation of the surviving or resulting corporation arising from the merger or consolidation, including any suit or other proceeding to enforce the right of any stockholders as determined in appraisal proceedings pursuant to § 262 of this title, and shall irrevocably appoint the Secretary of State as its agent to accept service of process in any such suit or other proceedings and shall specify the address to which a copy of such process shall be mailed by the Secretary of State. Process may be served upon the Secretary of State under this subsection by means of electronic transmission but only as prescribed by the Secretary of State.  The Secretary of State is authorized to issue such rules and regulations with respect to such service as the Secretary of State deems necessary or appropriate.  In the event of such service upon the Secretary of State in accordance with this subsection, the Secretary of State shall forthwith notify such surviving or resulting corporation thereof by letter, certified mail, return receipt requested, directed to such surviving or resulting corporation at its address so specified, unless such surviving or resulting corporation shall have designated in writing to the Secretary of State a different address for such purpose, in which case it shall be mailed to the last address so designated.  Such letter shall enclose a copy of the process and any other papers served on the Secretary of State pursuant to this subsection. It shall be the duty of the plaintiff in the event of such service to serve process and any other papers in duplicate, to notify the Secretary of State that service is being effected pursuant to this subsection and to pay the Secretary of State the sum of $50 for the use of the State, which sum shall be taxed as part of the costs in the proceeding, if the plaintiff shall prevail thereinbe sent by a mail or courier service that includes a record of mailing or deposit with the courier and a record of delivery evidenced by the signature of the recipient.

Section 13 amends Section 253(a) to conform to new Section 267(a).

Section 23 creates new Section267.

Sections 24-25 amend Section 274 and 275(d) to require that a certificate of dissolution must set forth the date of the filing of the corporation’s original certificate of incorporation.

Section 26 amends Section 278 to confirm that Sections 279 through 282, including those applicable to winding up, also apply to corporations that have expired by their own terms.

Section 28 amends Section 371(b)(1) to require that in the qualification of a foreign corporation, the certificate from the corporation’s foreign jurisdiction must not be older than 6 months from the date of filing.

Section 29 amends Section371(b)(2) to expand the types of entities which may serve as the registered agent for a domestic or foreign corporations qualified to do business in Delaware.

These amendments together with the non-stock amendments I previously wrote about present opportunities and challenges when forming and operating Delaware corporations. Please contact me for further information. sgoldberg@delcorp.com

Congress Prepares to Interfere With New Business Formation

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com
http://www.delcorp.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. 

Senator Levin has pressed S.569 which would in part require disclosure of the legal and beneficial owners of private business entities. The Levin bill would require a human person resident in the US have in his or her possession personal information about the legal and beneficial owners of US domiciled business entities, other than publicly traded entities. The definition of “beneficial owner” is much more broad than necessary and the mechanics of the system, including a requirement of notarized documents signed by all beneficial owners, will make quick business formations, such as we have become accustomed to, a thing of the past.

Levin put forward S. 569 as a “homeland security” measure. The Senator has expressed concern that US business entities are being used by criminals and terrorists to shield their activities. The Senator’s claim may be correct. The difficulty posed by his proposal  is that it should not surprise anyone that crooks and terrorists will not tell the truth and will not disclose their true identity and will not identify all beneficial owners. It is unlikely that the bill if enacted would enhance homeland security, but as with many “homeland security” measures will only serve to inconvenience and annoy law abiding individuals.

Treasury is now putting forward its substitute for S. 569 Treasury Beneficial Owner Legislation . The Treasury bill will apply to all newly formed entities (other than publicly held entities) and all existing entities formed prior to the enactment of the legislation must comply within two years after enactment. It is my judgment that the Treasury is looking for a vehicle to discover “tax cheats” and is using the Levin bill as that vehicle. In the past the Treasury has sent subpoenas to states looking for the same information.

For the purposes of the Treasury legislation, the entities, referred to as “Covered Legal Entity”, which will be subject to the legislation are corporations, LLC’s, LP’s, LLP’s and any “non-U.S. entity qualified to do business in any State.” (Sec 3(a0(7)). Trusts will not initially be subject to the legislation.

Section 3(a)(2) [all references to Sections will be to the Treasury substitute] contains the definition of “Beneficial Owner” which is in my opinion,  extremely broad and includes persons exercising  indirect control through third parties. Each Beneficial Owner, under Section 3(b)(4) is required to provide specified information as well as a copy of a government issued identification to either a “Documentation Agent” or a “Licensed Documentation Agent”. The Licensed Documentation Agent will be a person who is licensed by the state to provide that function. In most cases that person will be a commercial service provider who also serves as the entity’s registered or statutory agent in that state. The “Documentation Agent” lacks the state license.

The states will be required to amend their business laws to comply with the legislation or risk loosing some un-specified type of federal funding.

“To protect the security of the United States, each State that receives funding from the [XX] shall, not later than the Effective Date, amend its laws to adopt a legal entity formation system that meets the following requirements: …”

The legislations requires that ”(B) Each Beneficial Owner of a Covered Legal Entity shall provide to such Covered Legal Entity a legible and credible copy of a government-issued photo identification document of such Beneficial Owner, to be provided to and maintained by the Documentation Agent or Licensed Documentation Agent at all times. In the case of any Beneficial Owner that is neither a citizen nor lawful permanent resident of the United States, such document shall be a legible and credible copy of the page(s) of the government-issued passport bearing a photograph and unique identifying information of such Beneficial Owner.”

If the legislation is enacted you will likely be doing business with a “Licensed Documentation Agent”. That term is defined as: “The term ‘Licensed Documentation Agent’ means, in any State, an individual or an entity that acts on behalf of a Legal Entity to fulfill the obligations set forth in Section 3(b)(2) of this Act, and that is licensed by such State pursuant to a State law or regulation that subjects the Licensed Documentation Agent to (i) registration, (ii) “fit and proper” licensing requirements of the managers and beneficial owners (including at a minimum identification, verification and physical presence requirements, absence of convictions for crimes of dishonesty or fraud, or regulatory proceedings that raise honesty or integrity concerns), (iii) effective and regular monitoring for compliance, and (iv) sanctions for noncompliance.” (Sec. 3(a)(8))

Once the legislation is enacted the process of business formation will change radically, as provided in the following section, detailed information must be provided to the the Licensed Documentation Agent who must preserve the information and make it available to law enforcement and must certify to the state on an “information statement” filed with the formation documents that the Agent has the information and documentation to meet the requirements of the law. At the time the entity is formed the enity must provide the state with:

“(1) OBLIGATIONS OF LEGAL ENTITIES
‘‘(B) Each applicant that designates a Licensed Documentation Agent in forming a Legal Entity under the laws of a State shall provide to the State at the time of formation of the entity, either— ‘‘(i) in the case of Covered Legal Entities, a licensed documentation agent information statement that:
(1) identifies the Licensed Documentation Agent by name and business or residential street address and contains his or her notarized signature; and (2) contains a statement, signed by the Licensed Documentation Agent, certifying that the obligations of Section 3(b)(1)(C) of this Act have been met; or ‘‘(ii) in the case of Exempt Legal Entities, an exempt entity statement that:
(1) identifies the Licensed Documentation Agent by name and business or residential street address; and (2) contains the signature of the Licensed Documentation Agent, stating that the certification and documentation required in section 3(b)(1)(D) have been obtained.

Covered Legal Entities formed after the enactment of the legislation will be required to continue to comply with the following:
‘‘(C) Each Covered Legal Entity formed under the laws of a State after the Effective Date shall:
‘‘(i) have a Documentation Agent or Licensed Documentation Agent located within the United States at all times; and
‘‘(ii) provide to the Documentation Agent or Licensed Documentation Agent at the time of formation, a statement of beneficial ownership signed by each Beneficial Owner (in the case of an Licensed Documentation Agent), and a legible and credible copy of a government-issued photo identification document of each Beneficial Owner, to be maintained by the Documentation Agent or Licensed Documentation Agent at all times. In the case of any Beneficial Owner that is neither a citizen nor lawful permanent resident of the United States, the Documentation Agent or Licensed Documentation Agent shall obtain and maintain a legible and credible copy of the page(s) of the government-issued passport bearing a photograph and unique identifying information of such Beneficial Owner

The legislation provides for a two year window after adoption for existing entities to come into compliance.
“(E) Each Legal Entity formed under the laws of a State before the Effective Date shall comply with the requirements of subsections (A) through (D) above, as appropriate, by the date that is two years after the Effective Date.

Upon the occurrence of any change in the beneficial ownership, the company must update the beneficial ownership information within 60 days:
‘‘(F) Except as provided in subsection (G) below, each Covered Legal Entity formed under the laws of a State is required to update its beneficial ownership information statement within 60 days of the date of any change in either beneficial ownership or beneficial ownership information by providing an amended beneficial ownership information statement either to the State (signed by the Documentation Agent), or to the Licensed Documentation Agent, as applicable, and by providing corresponding updated identification documentation to the Documentation Agent or to the Licensed Documentation Agent.

Goldberg’s LLC/Corporate Seminar

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com
http://www.delcorp.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. 

On June 16, 2010, Steven Goldberg spoke at a seminar titled LLC or Inc.? Entity Selection for a Small to Medium Sized Business.The two hour presentation focused on the principle non tax differences between LLCs and corporations as well as the process to form or incorporate the entity. The program materials include a form of LLC company agreement as well as a stockholders agreement. Attached here are the program materials Should Your Small Business Be A LLC or Corporation? The video of this presentation is available on the Video page of this Blog.

2010 Amendments to the Delaware General Corporation Law (DGCL)

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com
http://www.delcorp.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. 

[These Amendments were signed into law on June 10,2010, by the Governor and will be effective August 2, 2010]

The Delaware Bar each year proposes to the Delaware General Assembly updates to its major business statutes, the DGCL, LLC Act and DRULPA. This year the Bar has proposed two bills to amend the DGCL. The first bill has been introduced as HB 341 which is a major rewrite of the DGCL dealing with non-stock corporations organized either for profit or as a not-for-profit corporation, either with a charitable purpose or a non-charitable purpose. HB 341 was a herculean undertaking by the drafting committee and they should be congratulated for their efforts. In a report which accompanied the draft the Committee reported that nonstock corporations, “their second-class status in the DGCL may leave practitioners unable to provide complete, confident legal guidance regarding their governance”. The Blackline of Revisions to DGCL contains the entire DGCL and shows the black lined changes being made as a result of HB 341. [HB 341 was signed into law on May 3, 2010, with an effective date of August 1, 2010.]

The second group of amendments are contained in HB 375 which are the general 2010 DGCL amendments. Section 23 of the Bill adds a new Section 267 to the DGCL which permits a short form merger between a subsidiary Delaware corporation and a LLC or other entity parent. The LLC amendments contained in a recent post reflect the LLC Act side of the DGCL amendment.

Sections 1-3 and 16-17 of the Bill reflect the addition of new Section 267.

Section 4 amends Section 132(b) to confirm that the provision setting requirements to serve as a registered agent apply to registered agents for both domestic and foreign corporations.

Section 5 amends Section 145(d) dealing with the decision to indemnify a person who is a present or former director, officer, employee or agent and clarifies that the decision is made by specified decision making bodies of the corporation providing the indemnification.

Section 6 amends Section 145(e) by striking the subsection in its entirety and adds a new subsection (e). The amendment is intended to clarify that the first sentence is intended to apply to advancements of expenses provided to a current officer or director of the corporation. The second sentence provides that the corporation may provide an advancement of expenses to other specified persons “upon such terms and conditions, if any, as the corporation deems appropriate”.

Section 7 amends Section 242(b)(1). The current Section provides in part that the notice of the proposed amendment to the stockholders shall set forth such amendment in full or in a brief summary “as the directors deem advisable”. The amendment deletes the quoted language so that the decision to provide the amendment or a summary may be made by others.

Sections 8, 10-11, 14, 18 & 20 clarify that in the case of a merger, the certificate of incorporation of the surviving corporation may be “amended and restated in its entirety” rather than just “such amendment or changes … as are desired to be affected.”

Section 9 amends Section 251(c) dealing with sending either the agreement of merger or a summary of the agreement to stockholders in a manner similar to the amendment to Section 242(b)(1) in Section 7 of the Bill.

Sections 12, 15, 19, 21-22, 27, & 30-35 amend various section of the DGCL to permit service of process upon the Secretary of State by “means of electronic transmission” pursuant to rules to be adopted by the Secretary.

Section 13 amends Section 253(a) dealing with short form mergers between a corporate parent and its subsidiary or subsidiaries in view of new Section 267(a).

Sections 24 & 25 require that a certificate of dissolution filed under either Section 274 or 275(d) must contain the date of filing of the corporation’s original certificate of incorporation with the Secretary of State.

Section 26 amends Section 278 to confirm that sections 279-282 dealing with the dissolution of a corporation also apply to corporations which have expired by their own terms.

Section 28 amends Section 371(b)(1) to require that the application of a foreign corporation to register must be accompanied by a good standing certificate issues within 6 months of the application.

Section 29 amends Section 371(b)(2) to expand the types of entities which may serve as a registered agent for a foreign corporation.

Delaware Provides Predictability of Outcome

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com 
http://www.delcorp.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law.
 

On April 6, 2010, the Delaware Supreme Court entered its decision in the consolidated cases of Nemec v. Shrader and Wittkemper v. Sharder. Nemech and Wittkemper were former stockholders of the consulting firm Booz Allen. The defendants were the directors of the company. When the pettioners retired they had a 3 year window to put un-executed options to the company at “book value”, after that 3 year period the company had the right to redeem the options at “book value” at any time.

The petitioners having failed to exercise their put right, the Company exercised its right to redeem the options. The issue sub judice arose over the timing of the redemption. It appears that at the time of the redemption the Board was aware that the company was about to enter into a transaction to sell a portion of the company for $2.54 billion. The result of the timing was to shift $60 million from the proceed that the petitioners would have received from the transaction to the active stockholders including the Directors.

The petitioners alleged that the company violated the implied contratual covenant of good faith and fair dealing.  According to the petitioners the company’s decision to redeem the shares when it did was made in bad faith.

The Court of Chancery had dismissed the petitioners claims and they appealed. The Supreme Court stated that “[w]e cannot reform a contract because enforcement of the contract as written would raise ‘moral questions’.” In its decision it stated that it would only imply contract terms if a party had acted “arbitrarily or unreasonably” and had denied the other party the benefit of their bargain. “Parties have a right to enter into good and bad contracts, the law enforces both.”

At a visceral level one could argue that the shift of $60 million must logically violate the implied contractual covenant of good faith and fair dealing. After getting past the visceral level you can see that the court was absolutely correct. This is not the case of widows or orphans being taken advantage. The two petitioners were stockholders of one of the nation’s most sophisticated consulting firms. In hind sight they made a bad bargain by allowing the company unfettered timing of the redemption, but that was their deal, like it or not. The Court stated that it will enforce “bad contracts”.

As lawyers we look to the courts for predictability of outcome. We want the courts to enforce the contracts that people negotiate and sign. We do not want courts re-writing parties agreements because the court concluded that they had entered into a bad deal or another parens patrea reason. This predictability of outcome is one of several reasons that practitioners choose Delaware business entities as that choice makes Delaware courts available to their clients. See my recent post http://www.delawarellcblog.com/wp-admin/post.php?action=edit&post=482 Institute for Legal Reform Ranks Delaware’s Legal Climate Number 1 In the Nation.

2010 Amendments to the Delaware LLC Act Are Signed Into Law

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com 
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law.
 

The 2010 amendments to the Delaware LLC Act have been signed into law by the Governor. The amendments have an effective date of August 2, 2010. HB 372. This legislation was the product of a years’ work by the Delaware Bar Association’s Alternative Entity Sub Committee of the Corporation Council. I am a member of the Committee, though the comments expressed herein are mine and not necessarily those of the Committee. The Committee’s work is reviewed by the Corporation Council and the Bar Association’s Executive Committee, it is then recommended to the General Assembly.

I previously made a post on a Chancery Court decision on the application of the statute of frauds to an oral Delaware LLC Agreement. Section 1 of the Bill confirms that notwithstanding the decision of the Court of Chancery, the statute of frauds does not apply to an oral LLC Agreement.

Sections 2, 26 & 27 of the Bill were included at the request of the Secretary of State and permit service of process upon the Secretary of State by means of “electronic transmission” in accordance with rules to be adopted by the Secretary.

Section 3 is a confirmation that unless otherwise provided in a LLC Agreement, the LLC has the power and authority to grant, hold or exercise a power of attorney, including an irrevocable power of attorney.  Section 5 provides that powers of attorney granted regarding to the organization, internal affairs or termination of a LLC granted by a member, a person seeking to become a member or an assignee of a member shall be irrevocable if it states that it it is irrevocable and is coupled with an interest sufficient in law to support an irrevocable power. The section states that a power is coupled with an interest if it  is granted regarding to the organization, internal affairs or termination of a LLC granted by a member, a person seeking to become a member or an assignee of a member of the LLC and the power is granted to the company, a manager, member or certain other designated persons.  Much of the discussion regarding powers of attorney resulted from unfortunate legislation adopted in New York which brought into question may powers routinely granted in commercial transactions.

In tender offers, the offeror will generally structure the tender using a Delaware LLC as the offeror and following the close of the transaction will enter into a merger with the target. Delaware does not have a short form merger provision which would permit a parent LLC to merge with a 90% owned subsidiary corporation. (In a short form merger the parent owning not less than 90% of the subsidiary may cause a merger between the parent and subsidiary without the approval of the remaining 10% stockholders or members.) On the corporate side a new Section 267 of the DGCL provides the mechanism for short form mergers. Sections 6, 7, 8, 9, 10, 11, 13, 14, 15, 16, 17, 20 and 30 facilitate the short form merger.

Sections 12, 18 & 19 permit service upon the Secretary of State under 18-209(c)(8), 213(b)(7) and 216(e)(7) by electronic transmission in accordance with rules adopted by the Secretary.

Section 21 amends 18-305(f) which grants the Court of Chancery the power to enforce a demand for information under Section 19-305. As currently drafted the Section only permitted the Court to order  the disclosure of a current list of members and their last know address.  The Amendment grants authority to the Court to order disclosure of all of the information set out in subsection (a). The amendment allows the parties to shorten or extend the 5 day response period in the Company Agreement, but not beyond 30 days.

Section 22 is a technical amendment to 18-305(g) to clarify that the right to obtain information may be restricted in an amendment to a Company agreement and that the restriction are not intended to limit any other restrictions provided under the Chapter.

Sections 23 and 24 confirm the circumstances under which an assignee may be admitted as a member. Section 18-702 is amended by providing that in addition to an assignee being admitted “except a provided in a limited liability company agreement” that an assignee may be admitted upon the affirmative vote or written consent of all of the members, deleting the phrase “other than the member assigning the limited liability company interest; or (2) Compliance with any procedure provided for in the limited liability company agreement”. Section 18-704(a) is also amended to make it clear that the assignee is admitted as a member “as provided in the limited liability company agreement” and “Unless otherwise provided in the limited liability company agreement, upon the affirmative vote or written consent of all of the members of the limited liability company” and deleting, inter alia, the phrase “other than the member assigning…”.

Section 25 requires that in order for a foreign LLC to register in Delaware under 18-902 it must supply a good standing certificate and if the certificate is in a foreign language, a translation.

Section 29 adds to 18-1101 a new subsection (i) that reads “A limited liability company agreement that provides for the application of Delaware Law shall be governed by and construed under the laws of the State of Delaware in accordance with its terms.” This may seem obvious that if the parties form a LLC under the Delaware Act that it should be construed under the laws of Delaware and in most cases it is, in particular regarding its organization, dissolution and internal affairs. It is not entirely clear what constitutes “internal affairs” however the term is often found in decisions and law review articles dealing with LLC’s as well as corporations. One area where the issue arises is when the agreement address issues that are not within those categories such as employment, redemption and other similar business deal issues. Delaware Courts have upheld that a LLC agreement may be governed by the laws of other states and in one case permitted it to be governed by the DGCL.

The issues addressed in these amandments should not create substantial debate. The only issue which may cause some discussion is Section1 and its relationship to the Olson case.

Please feel free to contact me if you have any questions.

Institute for Legal Reform Ranks Delaware’s Legal Climate Number 1 in the Country for Fairness

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com 
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law.

The Institute for Legal Reform, an arm of the U.S Chamber of Commerce, has again ranked the legal environment in Delaware number 1 in the nation.  The survey has been conducted by the Institute since 2002 and in each year Delaware has been ranked number 1. In the ten categories Delaware ranked number 1 in 8 of the categories.

The report is based upon interview with 1,482 general counsel and senior management of companies with revenue of at least $100 million. The report states that two-thirds, or 67%, of the 1,482 corporate lawyers contacted for the survey say a state’s lawsuit environment is likely to impact important business decisions at their company, such as where to locate or expand their business—up 10% from just three years ago.

Other states ranking near the top were #2 North Dakota, #3 Nebraska, #4 Indiana, and #5 Iowa. States often selected by large companies for business formations Colorado was #8, New York was #23, Nevada was #28, New Jersey was #32, Florida was #42, California was #46 and bringing up the bottom was West Virginia at #50.

The decision as to where to form a LLC or a corporation will be based upon many factors. In a recent article titled Jurisdictional Competition for Limited Liability Companies written by Professors Bruce H. Kobayashi and Larry E. Ribstein In the Illinois Law and Economic Research Papers Series, research Paper No. LE09-017, they state on page 1, “…we find evidence that large LLC’s, like large corporations, tend to form in Delaware, and that they do so for many of the same reasons–that is, for the quality of Delaware’s legal system.”

Companies do not intend to be sued when they are considering a state in which to form, however as pointed out in the Illinois article, companies consider the legal environment in a state as an important factor in case they are sued. It is interesting to note that when a company is formed by a large law firm, the firms will generally select Delaware while small firms select their own jurisdiction.

If a company is to be formed in a state other than the local jurisdiction, it makes no sense to form in a state which ranks 23 or below for fairness in its legal climate.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or have a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Delaware LLC Agreement is Subject to the Statute of Frauds

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com 
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law.

[The 2010 Amendments to the Delaware LLC Act removes oral LLC agreements from the Statute of Frauds]
Section 18-101(7) of the Delaware LLC Act provides that the LLC agreement means “any agreement (whether referred to as a limited liability company agreement, operating agreement or otherwise) written, oral or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business.” If an agreement may be “oral or implied” one could reasonably assume that such an agreement has been taken out of the Statute of Frauds.

Delaware’s Statute of Frauds, 6 Del. C. §2714(a) bars the enforcement of an agreement “that is not to be performed within the space of one year from the making thereof,” unless it is (1) written and (2) signed by the party against whom the agreement is to be enforced.  Only if the parties cannot possibly perform the agreement within one year does the statute of frauds apply and require a writing, signed by the charged party.

The Delaware Supreme decided the case of Olson v. Viking Global on December 15, 2009. Olson v Viking Global The case in part involved the enforcement of an unsigned LLC Company Agreement which was drafted for a hedge fund. Olson sought to enforce an earn out provision of the unsigned agreement on the basis that it represented an “oral” Company Agreement as permitted under the Act. The Company and the remaining members defended on the basis that an agreement had not been formed and even if there was an agreement a provided in the unsigned agreement, the provision in question was unenforceable under the Delaware Statute of Frauds as the earn out could not possibly be performed within one year of the date the agreement was allegedly made.

The Court preferenced it Statute of Frauds analysis at page 20 that:

“We have often declined to decide an issue that does not affect a case’s disposition, but this issue is one that could considerably impact the drafting and enforcement of LLC agreements. For this reason and because this issue involves a question of law and statutory construction, we proceed to review it de novo.”

…

“The Delaware LLC Act seeks “to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” To that end, the Delaware LLC Act allows “written, oral or implied” LLC agreements. The Delaware LLC Act also provides that “[a] limited liability company is not required to execute its limited liability company agreement” and that “[a] limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.” Thus, the Delaware LLC Act generally allows parties to enforce unwritten, unsigned LLC agreements.”

“In this case, we must determine whether parties to a Delaware LLC agreement may enforce an unsigned or unwritten LLC agreement that would require more than a year to complete. We must adhere to the rules of statutory construction and, whenever possible, presume consistency between recent legislation and pre-existing law. “Laws are assumed to be cumulative, not destructive of other laws.” We “assume[] that when the General Assembly enacts a later statute in an area covered by a prior statute, it has in mind the prior statute,” and thus, “statutes on the same subject must be construed together so that effect is given to every provision unless there is an irreconcilable conflict between the statutes . . . .” ”

“… We have long recognized that “unless it is expressly so provided, one act does not ordinarily repeal another, if both, in whole or in part, can be construed together.” We are “reluctant to find repeal by implication even when the later statute is not entirely harmonious with the earlier one,” and “[i]f two statutes conflict somewhat, [we] must, if possible, read them so as to give effect to both, unless the text or legislative history of the later statute shows that [the legislature] intended to repeal the earlier one and simply failed to do so expressly.””

…

“The legislative history of the LLC Act does not demonstrate the General Assembly’s intent to place LLC agreements outside of the statute of frauds. When the General Assembly originally enacted the LLC Act in 1992, it only permitted written LLC greements. In 1995, the General Assembly amended the LLC Act to permit “any agreement, written or oral.” In 2007, the General Assembly further expanded the LLC Act to allow “implied” LLC agreements. In its current form, Section 18-101(7) of the LLC Act provides that LLC agreements may be “written, oral or implied.” ”

…

“Because we can construe the statute of frauds and the LLC Act together and the General Assembly did not clearly intend the LLC Act to render the statute of frauds inapplicable, there is no implied repeal of the statute of frauds. As the Vice Chancellor stated, the statue of frauds should “protect defendants against unfounded or fraudulent claims that would require performance over an extended period of time.” The legislature enacted the statute of frauds over a century ago, and its purpose remains valid. If the General Assembly intends to limit the application of the statute of frauds by removing LLC agreements from its scope, the General Assembly must say so explicitly. “[We] will not do by judicial implication what the General Assembly itself has declined to do by express legislation.” Accordingly, we hold that the Delaware LLC Act does not preclude application of the statute of frauds to LLC agreements. Therefore, the statute of frauds applies to LLC agreements, and the Vice Chancellor correctly so held.”

[Citations and foot notes omitted]

The Court’s holding in this case may come as a suprise to many practitioners who reasonably  interpreted 18-101(7) as an implied repeal of the Statute of Frauds. While most agreements do not contain complicated earn out provision that last over a series of years, some agreements do contain provisions that implicate the Statute of Frauds. The use of oral or implied Company Agreements has always been a difficult practice issue. While permitted by the Act, the use of oral agreements has always been frowned upon by practitioners. This decision gives one more reason why the practioner will press his or her clients to reduce their agreements to writing and to follow through with clients to assure that agreements sent out for signature are actually signed.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Motions to Transfer Litigation from Delaware, Forum Non Conveniens

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com 
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law.
The Delaware General Corporation Law and the Delaware Limited Liability Company Act have become the de-facto national corporation and LLC laws. As such the State of Delaware is and has been the favored jurisdiction to form business entities. As the favored jurisdiction it also the jurisdiction where many companies choose to litigate as a company’s jurisdiction of formation or incorporation is one of the jurisdictions where personal service may be had against a company without having to rely on a “long arm” statute.

The Judges of the United States District Court for the District of Delaware, the Delaware Superior Court and the Delaware Court of Chancery have an enviable national reputation for fairness and thoughtful jurisprudence which has caused an arm of the US Chamber of Commerce to rank Delaware number 1 in the nation as the best jurisdiction to litigate business disputes. Sometimes, however, one of the parties to such litigation seeks to transfer the litigation to another jurisdiction, often referred to as a montion Forum Non Conveniens. They seek transfer for a variety of reasons, the convenience of the parties, a witness may not be available in Delaware, a similar case is pending in the other jurisdiction or the interests of justice. Recently the USDC handed down a decision in the case of Ethicon Endo-Surgery, Inc., v. Hologic, Inc., and Suros Surgical Systems, Inc., CA 09-580-JJF. Ethicon v Hologic Both corporations are incorporated in Delaware.

In October, 2007, Hologic had commenced a patent infringement action against Ethicon in the USDC ED Ohio. That matter was scheduled for trial on November 16, 2009. On April 30, 2009, Ethicon commenced the Delaware Action which is scheduled for trial in September 2010.  The Delaware Action involved additional patents and an affiliated party. Hologic filed a motion to transfer the action to Ohio where it contends that related patents are being litigated, that the parties to the actions are the same and that the “public interest factors” weigh in favor of transfer.

The Court began its analysis under 28 U.S.C. § 1404(a) “for the convenience of the parties and witnesses, in the interest of justice, a district court may transfer a civil action to any other district of division where it might have been brought.” The leading case in the 3rd Circuit is Jumara v. State Farm Ins. Co., 55 F.3d 873 (3d Cir. 1995) where in the court set out 6 tests to consider the private interests of the litigants: “(1) the plaintiff’s choice of forum; (2) the defendant’s preferred forum; (3) where the claim arose; (4) the convenience of the parties; (5) the convenience of the witnesses, but only to the extent that the witnesses may be unavailable for trial in one of the fora; and (6) the location of books and records, again, only to the extent that they may not be available in one of the fora.” Id. at 879. In addition the Jumara court laid out 6 additional test when considering the “public” interests of the litigants; “(1) the enforcability  of the judgment; (2) practical considerations that could make the trial easier, quicker or less expensive; (3) court congestion; (4) local interest in the controversy; (5) public policies of the fora; and (6) the trial judge’s familiarity with the applicable state law.” Id. at 879-80.

“Generally, a plaintiff’s choice of forum is entitled ‘paramount consideration,’ and should not lightly be disturbed. Shutte v. Armco Steel Corp., 431 F.2d 22, 25 (3d Cir. 1970). The weight assigned to this factor is somewhat attenuated here because the movant’s burden is lessened when a plaintiff does not bring suit in its ‘home turf.’ Waste Distillation Tech., Inc., v. Pan Am. Res., Inc.,775 F.Supp. 759, 764 (D. Del. 1991). Even given this lesser burden, the Court concludes this Motion should be denied because the private and public interest do not strongly enough favor transfer, and because Ethicon’s choice of forum does relate to its legitimate, rational concerns. See Dish Network Corp. v. TiVo, Inc., C.A. No. 08-327-JJF, 2009 WL 1529836, at 2 (noting that a defendant’s incorporation in Delaware provides a plaintiff with a rational, legitimate reason to bring suit in Delaware.)”

The Court acknowledged that “[t]he public interest factor only slightly weighs in favor of transfer,” stating that the Ohio Court is more familiar with 2 of the patents than this Court. However the Court stated that “due to the Delaware Action, this Court must also become familiar with the technology”. “Because this action involves a different accused product and two patents not asserted in the Ohio Action, the Ohio Court would likely have to conduct further discovery and perform additional claim construction at the same time this Court would be conducting discovery with similar technologies in the Delaware Action.”

“Although the Court recognizes that the deference given to Ethicon’s choice of forum is somewhat lessened by virtue of the fact that Ethicon has not filed in its home turf, the public and private interest factors do not weigh strongly enough in favor of transfer”.

This is a well reasoned opinion by a well respected jurist. Transfer decisions never are black and white, they often turn on the facts and circumstances of the case and often how interested the judge himself or herself is in the subject matter of the case.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.