The State of Delaware continues to ensure that its alternative entity statutes remain state of the art. In furtherance of that objective, effective August 1, 2014, Delaware amended the Delaware Limited Liability Company Act (LLC Act), the Delaware Revised Uniform Limited Partnership Act (LP Act), the Delaware Revised Uniform Partnership Act (GP Act), and the Delaware Statutory Trust Act (Trust Act). The following is a brief summary of certain of the significant amendments affecting Delaware limited liability companies (LLCs), limited partnerships (LPs), general partnerships (GPs), and statutory trusts (Trusts).
Providing Information to Communications Contact (LLC and LP Acts)
Every LLC and LP is required to maintain a communications contact to receive communications from its registered agent. The LLC and LP Acts have been amended to require an LLC and LP, upon receipt of a request by its communications contact, to provide the communications contact with the name, address, and telephone number of a natural person who has access to the record that contains the name and last known address of each partner, member, and manager of the LLC or LP. The LP and LLC Acts were also amended to require LLCs and LPs to maintain a current record of the name and last known address of each member, manager or partner.
Consents with a Future Effective Date (LLC, LP, GP, and Trust Acts)
The LLC, LP, GP, and Trust Acts have been amended to confirm that unless otherwise provided in the relevant organizational documents, a person who is not then a member, manager, partner, beneficial owner, or trustee, as applicable, but who expects to attain such status, may consent to any matter, provided that such consent will only be effective at a time when such person attains that status. These amendments were, in part, a response to the Delaware Chancery Court’s opinion in AGR Halifax Fund, Inc. v. Fiscina, 743 A.2d 1188 (Del. Ch. 1999), where the court concluded that director consents authorizing a charter amendment that were executed by people not yet directors were not valid even though they were not delivered until such people became directors. The AGR Halifax decision created uncertainty in transactions such as acquisition financings where boards were being replaced in connection with the financing. The amendments permit partners, members, managers, beneficial owners, and trustees to execute consents in advance of their attaining that status so long as the consents are not effective until such status is attained. Of course, organizational documents may prohibit such consents.
Books and Records Requests by Agents (LLC, LP, and GP Acts)
The Delaware General Corporation Law (DGCL) and the GP Act have provided that a shareholder’s or partner's attorney or other agent could make a books and records request. The LLC and LP Acts have been amended to confirm that a member or partner may make a books and records request in person or by an attorney or other agent. The 2014 amendments also provide that if an attorney or other agent is making the demand for access to books and records, then such demand must include the power of attorney or other writing that authorizes such agent to act in that representative capacity. The 2014 amendments to the GP Act also added a comparable requirement for general partnerships.
These amendments confirm what practitioners believe should have been the case for agents of members or partners. For example, in NAMA Holdings, LLC v. World Market Center Venture, LLC, 948 A.2d 411, 421 (Del. Ch. 2007), a case involving access to the books and records of an LLC, the Chancery Court stated that “if inspection rights are to have any substantive force, the party who benefits from them must be able to enlist the sophisticated assistance of attorneys, accountants, and other experts to meaningfully evaluate complex financial information.” The 2014 amendments eliminate the statutory inconsistencies between the DGCL and the GP Act, and the LLC and LP Acts, and therefore should eliminate any arguments that such inconsistencies support a position that agents should be denied access.
Revocation of Dissolution (LLC and LP Acts)
LLCs and LPs are limited life entities, meaning that the occurrence of certain events could result in their dissolution. As a result, LLCs and LPs are sometimes inadvertently dissolved. In 2005, amendments were made to the LLC and LP Acts to permit members and partners to revoke dissolution of LLCs and LPs. Although those amendments have proven to be very useful, some practitioners believe that their strict requirements made it too difficult to revoke dissolution. Consequently, the LLC and LP Acts have been amended to facilitate revocation of dissolution.
With respect to LLCs, prior to the amendments, a dissolution could be revoked if all remaining members, or if there were no members, the personal representative of the last remaining member, voted to revoke. This did not always work well, particularly in cases where there were many members. Further, if an LLC dissolved because its single member transferred its entire limited liability company interest to an assignee but failed to admit the assignee as a member, then there was no means to revoke the dissolution because the assignee was neither a member nor a personal representative of the member.
The LLC Act now provides that (1) if there was a vote to dissolve the LLC, then the revocation may occur by that vote (i.e., it can be less than unanimous), and (2) if there was no such vote to dissolve and there are still members, then the revocation may occur by amending the dissolution provisions in accordance with the LLC agreement. The latter may be particularly helpful in cases where the stated term of the entity expired without those controlling the entity being aware. The amendments also provide that if dissolution of the LLC was caused by there being no member (such as a single member transferring its limited liability company interest as described above), then dissolution may be revoked by the personal representative or assignee of the last remaining member. A mere assignee may now revoke dissolution when there are no members.
With respect to LPs, prior to the amendments, a dissolution generally could only be revoked pursuant to a unanimous vote of the partners. In addition to that requirement, if there had been a vote to dissolve the LP, then the revocation also had to be approved by any other person who voted in favor of the dissolution.
The LP Act now provides that if there was a vote to dissolve the LP, then that is the vote required to revoke the dissolution. The LP Act also provides that in the event of a dissolution pursuant to the LP agreement (other than a dissolution upon a specified vote, upon an event of withdrawal of a general partner, or upon the last remaining limited partner ceasing to be a limited partner), the dissolution may be revoked by amending the dissolution provisions in accordance with the LP agreement. Finally, if the dissolution is caused by an event of withdrawal of a general partner or the last remaining limited partner ceasing to be a limited partner, then dissolution may be revoked by a vote of all general partners, if any, and two-thirds in interest of the limited partners (or on a class or group basis if such classes or groups exist). If there are no limited partners, then the personal representative or assignee of the last remaining limited partner must instead consent.
These amendments should decrease the burden of the prior unanimous vote requirements, but there are restrictions on revocation that continue to be applicable. For example, an LLC or LP agreement may also provide that dissolution may not be revoked. Revocation of dissolution must occur prior to the filing of a certificate of cancellation terminating the entity’s existence. Finally, a dissolution of an LLC or LP that has been judicially decreed because it has been demonstrated that it is no longer reasonably practicable to carry on its business may not be revoked.
Usury (Trust Act)
In 1994, the LLC and LP Acts were amended to provide that members, managers, or partners may not assert the defense of usury in connection with obligations they owed to an LLC or LP. In 1996, similar amendments were made to the Trust Act so that obligations of a beneficial owner or a trustee to a trust were not subject to the defense of usury. In 2012, the LLC and LP Acts were again amended to provide that a member or partner could also not assert a defense of usury for obligations to a member, manager or partner. Consistent with these amendments, the 2014 amendments to the Trust Act provide that a defense of usury does not apply to obligations of a beneficial owner or trustee owed to another beneficial owner or trustee when the obligations arise under the governing instrument or a separate agreement in writing.
Voting by Trustees (Trust Act)
Prior to the 2014 amendments to the Trust Act, if a governing instrument was silent, it was unclear what vote was necessary to authorize an action by the trustees of a trust. The Trust Act has been amended to provide that if the governing instrument is silent as to the matter, then the default rule will be a vote of a majority of the trustees. A governing instrument may provide for a different voting arrangement for trustees whose vote is required to approve any action on behalf of a trust.
Trust Names (Trust Act)
The Trust Act was amended to restrict the use of the word “bank” in the name of a trust. Comparable amendments to the LLC and LP Acts were made in 2012, and the DGCL has had a similar restriction on the names of Delaware corporations since 1997. The Trust Act now specifically provides that the name of a trust may not include the word “bank” or any variation thereof, except for the name of a bank that is regulated as a banking operation. The Trust Act does, however, permit the use of the word “bank” or any variation thereof in a context clearly not referring to a banking business or likely to mislead the public or lead to abuse, all as determined by the Delaware Division of Corporations.
The 2014 amendments to Delaware’s alternative entity statutes reflect Delaware’s continuing commitment to maintaining the statutes governing LLCs, LPs, GPs, and Trusts.