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American Bar Association - Defending Liberty, Pursuing Justice

SUMMER 2011

Vol. 7, No. 4

 

BUSINESS LAW

 

Rethinking the Tire Without Reinventing the Wheel: Delaware Clarifies and Improves Business and Corporate Statutes for 2011

By Scott L. Matthews

Delaware long has sought to cement its role as the pre-eminent jurisdiction for the formation of business entities and as a leading commercial law jurisdiction. In 2011, the Delaware General Assembly amended the General Corporation Law of the State of Delaware (the DGCL), the Delaware Limited Liability Company Act (the LLC Act), the Delaware Revised Uniform Limited Partnership Act (DRULPA), the Delaware Revised Uniform Partnership Act (DRUPA), and the Delaware Statutory Trust Act (the DSTA), and adopted the Uniform Foreign-Country Money Judgments Recognition Act (UFCMJRA) to replace the Uniform Foreign Money Judgments Recognition Act (UFMJRA), in an effort that may best be analogized to improving tire technology without changing the fundamental shape or nature of the wheel. Unless otherwise stated, amendments are effective August 1, 2011.

In one of the more substantive amendments to the various entity statutes, DRULPA, DRUPA, and the LLC Act were amended to provide for a result different from that articulated by the Delaware Chancery Court in In re LJM2 Co-Investment, L.P. Limited Partners Litigation, 866 A.2d 762 (Del. Ch. 2004), in which the court held that if a partnership or LLC agreement contained a clause requiring a supermajority vote to amend any provision itself requiring a supermajority vote for action to be taken, then the supermajority amendment provision also applied to default provisions of the applicable entity statute not included in the text of the agreement. The amendments make clear that such a supermajority amendment provision does not apply to default provisions of the applicable entity statute, absent express contractual incorporation by reference.

DRULPA, DRUPA, and the LLC Act were also amended to allow for the filing of a certificate of correction to effectively “correct” the filing of a certificate of cancellation of a partnership or LLC that was filed prior to the completion of the winding-up process of the entity. The main problem these amendments were designed to eliminate is the situation where stakeholders in a Delaware LLC or partnership discover an asset or liability after termination of the legal existence of the entity, despite their best efforts to identify all actual or contingent assets and liabilities of the entity in the dissolution and winding-up process.

Written consents are another area of controversy in LLC and partnership law. The LLC Act, DRULPA, and DRUPA were amended to provide that when providing electronic evidence of written consent to actions to be taken by the entity, the members, managers, or partners, as the case may be, need not restate subject matter of the resolutions being adopted, as is required by the stockholders of a Delaware corporation.

DRUPA was amended to provide that a partner is not personally responsible for liabilities arising out of circumstances or events occurring during the period in which a general partnership has limited liability partnership status. Previously, the statute provided protection for partners only with respect to liabilities incurred during the period in which a partnership is a limited liability partnership—not for liabilities which materialize later but are the result of circumstances or events during the period of the partnership’s LLP status. DRUPA was also amended to clarify that the cancellation of a statement of partnership existence does not act to cancel a statement of qualification as an LLP, or vice versa.

The LLC Act was amended to establish a default rule for amendment of an LLC agreement. Previously, the statute did not address whose consent was required for amendment of an LLC agreement, in the absence of an express amendment provision. Now, if the LLC agreement does not provide for the manner in which it is to be amended, the unanimous consent of the members is required under the new default rule. Unlike the majority of the other amendments, this one takes effect January 1, 2012.

In addition to the more substantive amendments, there were several amendments designed to make the practical administration of Delaware business entities easier, and several amendments to the DGCL that clarify certain matters.

The alternative entity statutes were all amended to provide that, effective January 1, 2012, if a certificate establishes a future effective date, such date may not be more than 180 days from the date of filing. The alternative entity statutes were also all amended to provide that parties may no longer form an entity with the same name as another domestic entity of the same type (prior to August 1, 2011, this was permitted but required the consent of the existing domestic entity). All of the entity statutes were revised to clarify that when converting or domesticating, a certificate of domestication or certificate of conversion, as well as the applicable entity certificate, must be filed simultaneously, and that if a future effective date is used, it must be identical in both filings. Finally, for all Delaware business entities, parties must provide the postal code of the registered agent, registered office and trustee, as applicable, when making any new filing that includes the address of such party.

The DGCL was amended to confirm that a provision of a corporate charter or bylaws that provides for a right to indemnification or advancement of expenses may not be eliminated or impaired by a change to the certificate of incorporation or bylaws after the occurrence of the act or omission that is the subject of such provision, unless the provision in effect at the time of the act or omission expressly authorizes such elimination or impairment. The provision had been added in 2009 to supersede a contrary judicial decision, but it was unclear whether the provision was limited to restricting the effect of the amendment solely of the original provision giving rise to the right to indemnification or advancement, and not other provisions of the charter or bylaws. The DGCL was also amended to confirm that the filing of a certificate of dissolution, merger, transfer, or conversion requires the payment of franchise taxes due through the month of effectiveness of the filing, and the filing of an annual report for the year in which the filing is to become effective, on the part of the corporation that is to be dissolved, merged, transferred or converted by the filing.

The DSTA was amended to provide that an agreement of merger adopted in accordance with the DSTA may amend the governing instrument, or may provide for the adoption of a new governing instrument, of the surviving or resulting statutory trust. The DSTA was also amended to provide that a registered agent of a statutory trust may resign as registered agent, either with or without appointing a successor (though if resigning without appointing a successor, the resigning agent must notify the trust at least 30 days prior to such resignation, and the resignation is not effective until 30 days after the filing of the certificate of resignation).

In addition to the important amendments made to the various business entity statutes, Delaware also adopted the UFCMJRA, promulgated by NCCUSL and recommended by the ABA. The UFCMJRA replaces the UFMJRA of 1965. Although it is similar to its predecessor statute, the UFCMJRA makes key procedural distinctions and clarifications. Among them, the statute now expressly provides that judgments entitled to full faith and credit under the US Constitution are not subject to the statute. Although the statute now expressly requires the party seeking recognition of a judgment to bear the burden of proof that the judgment is subject to UFCMJRA, it also expressly requires that a party bears the burden of proof when seeking to establish that a specific element of the statute requires that a judgment not be recognized. The UFCMJRA further provides guidance as to the process for seeking recognition of a foreign judgment. Finally, the UFCMJRA provides that a judgment must still be enforceable in its country of origin, or, if the country of origin does not have a relevant statute of limitations, it provides a 15-year statute of limitations on enforcement in the enacting jurisdiction. The enactment of the UFCMJRA was effective immediately upon signing of the bill into law by Governor Jack Markell on June 28, 2011.

With these amendments, Delaware has ensured that the coherent, practical body of law that has been developed in the state over the course of the past century has been enhanced yet again. Without reinventing the wheel, the general assembly, with the assistance of the state bar, has improved upon its tires, and the next step will be for the various constituencies to give them a kick.

Scott L. Matthews is Counsel at The Delaware Counsel Group LLP in Wilmington, Delaware, where he focuses on Delaware corporate and alternative entity advice and commercial transactions. He can be reached at smatthews@delawarecounselgroup.com.

© Copyright 2011, American Bar Association.