2010 Amendments to the Delaware LLC Act Are Signed Into Law

Steven D. Goldberg, Esq.
Wilmington, DE
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.

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