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Practice Area Newsletter

American Bar Association - Defending Liberty, Pursuing Justice

Summer 2009

Vol. 5, No. 4

 

Business Law

 

Featured Author

 John J. Paschetto is a partner in the business and tax section of Young Conaway Stargatt & Taylor, LLP, in Wilmington, Delaware. His practice focuses on governance issues faced by Delaware corporations, limited liability companies, and limited partnerships. He also serves on the committee of the Delaware State Bar Association responsible for proposing amendments to the Delaware Revised Uniform Limited Partnership Act, the Delaware Revised Uniform Partnership Act, and the Delaware Limited Liability Company Act. John can be reached at JPaschetto@ycst.com or 302-571-6608.

2008 Amendments to the Delaware Limited Liability Company Act and Limited Partnership Act

Effective August 1, 2008, the Delaware legislature made several significant amendments to the state’s Limited Liability Company Act and Limited Partnership Act. Among other things, the amendments clarified provisions regarding the execution of documents and effectively enlarged the subject-matter jurisdiction of the Court of Chancery. In addition, effective January 1, 2008, the legislature increased the state’s annual franchise tax for limited liability companies (LLCs) and limited partnerships (LPs) from $200 to $250.

Execution of Certificates When Entities Domesticate or Convert

The LLC Act and LP Act permit certain entities to domesticate in Delaware and to convert to Delaware LLCs or LPs. (6 Del. C. §§ 18-212 (LLC domestication), 18-214 (LLC conversion), 17-215 (LP domestication), 17-217 (LP conversion).) Domestication and conversion both involve, among other things, the filing of a certificate with the Secretary of State of Delaware.

Before the 2008 amendments, such certificates were to be signed by “1 or more authorized persons” (in the case of an LLC) or by “all general partners” (in the case of an LP; see 6 Del. C. § 17-204(a)(1)). The term “authorized persons” as used in the domestication and conversion provisions of the LLC Act had created some uncertainty. The term was frequently understood to mean persons authorized by a Delaware LLC. But in the case of a domestication in Delaware as an LLC or a conversion to a Delaware LLC, the Delaware LLC would not exist until after the execution and filing of the appropriate certificate. Similarly, the LP Act’s reference to “all general partners” could be problematic because, for example, a corporation converting to an LP would not have general partners until after the certificate of conversion was signed and filed.

Those concerns do not arise under the amended LLC and LP Acts. As amended, the sections dealing generally with execution of documents now provide that certificates relating to conversion or domestication may be signed by “any person authorized” by the entity to be converted or domesticated. (6 Del. C. §§ 18-204, 17-204.) At the same time, the amendments did not cast doubt on the effectiveness of certificates executed pursuant to the prior texts of the LLC and LP Acts, since the amended provisions retain the option of having certificates executed by “all general partners” or “1 or more authorized persons[.]”

Chancery Court Jurisdiction over Matters Involving LLC Management

The 2008 amendments effectively expanded the subject-matter jurisdiction of the Delaware Court of Chancery, by making the meaning of “manager” in sections of the LLC Act dealing with jurisdiction consistent with the section on managers’ implied consent to service.

Formerly, “any member or manager” had standing to bring a claim in the Court of Chancery regarding the right of a person to be a manager. (6 Del. C. § 18-110.) The Court of Chancery also had jurisdiction over any action “to interpret, apply or enforce” the rights or duties of members or managers. (6 Del. C. § 18-111.) “Manager” was defined, in section 18-101(10), as a person named as a manger in the LLC agreement or pursuant to the LLC agreement.

Thus, persons that were essentially acting as managers but were not named as such could not bring an action in the Court of Chancery under section 18-110 (unless they were also members), and could not have their rights and duties adjudicated by the Court under section 18-111. Moreover, in this respect sections 18-110 and 18-111 differed from section 18-109, under which both managers and persons that materially participate in the management of an LLC are deemed to have consented to service in Delaware in actions relating to the LLC.

As amended, sections 18-110 and 18-111 are now consistent with section 18-109 in their definitions of “manager.” For purposes solely of those sections, the term covers not only a person named as a manager in or pursuant to the LLC agreement, but also any person that “participates materially in the management of” the LLC. The definitions also include a proviso, to the effect that the power to select a manager or participate in the selection of a manager “shall not, by itself, constitute participation in the management of” the LLC.

Increase in the Annual Franchise Tax; Other Changes

The annual franchise tax payable by Delaware LLCs and LPs, and by foreign LLCs and LPs registered in Delaware, was increased from $200 to $250 by the 2008 amendments. (6 Del. C. §§ 18-1107, 17-1109.) This was the first increase in the annual franchise tax for LLCs and LPs since 2003. ( See H.R. 268, 142d Gen. Assembly (Del. 2003).)

Clarification of certain definitions was also effected by the 2008 amendments. Before the amendments, the definition of “limited partnership” and “domestic limited partnership” included the phrase “a partnership formed by 2 or more persons under the laws of the State of Delaware[.]” (6 Del. C. § 17-101(9).) This phrase appeared to prohibit the formation of a limited partnership by one person (a sole general partner, pursuant to section 17-201), prior to the admission of one or more limited partners and any additional general partners. To exclude that interpretation, the definition was amended to read, in pertinent part, “a partnership formed under the laws of the State of Delaware consisting of two (2) or more persons[.]”

In addition, the definition of “person” was amended in both the LLC Act and the LP Act to make clear that “person” includes all forms of trusts. (6 Del. C. §§ 18-101(12), 17-101(14).) In the definition, the following list of types of trusts was inserted after the word “trust”: “including a common law trust, business trust, statutory trust, voting trust or any other form of trust[.]”

Finally, a new subsection was inserted in section 17-303. That section provides that a limited partner may be liable to third parties for the obligations of the LP if “he or she participates in the control of the business[,]” and it then sets forth a non-exclusive list of rights and capacities whose exercise or assumption will not, by itself, amount to such participation. Among the capacities in that list was independent contractor, contractor, agent, or employee of the LP or of a general partner, or a fiduciary of an entity that is a general partner. (6 Del. C. § 17-303(b)(1).) The 2008 amendments added to the list a subsection providing that the nomination, appointment, election, or removal of the foregoing persons likewise does not constitute participation in the control of the business. (6 Del. C. § 17-303(b)(8)n.)

John Paschetto practices law in Wilmington, Delaware, where he is a partner in the business and tax section of Young Conaway Stargatt & Taylor, LLP. He can be reached at JPaschetto@ycst.com and (302) 571-6608.

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