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Posted: February 1st, 2012

The Importance of Alternative Entities in M&A Transactions

Posted: February 1st, 2012

Updates

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Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : February 2nd, 2012

Section 220 Action is not a Substitute for Litigation Discovery.

In Central Laborers Pension Fund v. News Corp., C.A. No. 6287-VCN (Del. Ch. Nov. 30, 2011), the Delaware Court of Chancery dismissed an action to inspect the books and records of defendant News Corporation (“News”), under Section 220 of the Delaware General Corporation Law (“Section 220”), on the basis that plaintiff’s purpose for making such a demand was not proper where plaintiff had already filed a derivative complaint against News. The derivative complaint alleged that News’s directors had breached their fiduciary duties in connection with a proposed acquisition of Shine Group Limited by News (the “Potential Transaction”). The 220 action sought books and records for the purpose of investigating potential breaches of fiduciary duty by the News board in connection with the Proposed Transaction. The Court found that, by filing its derivative complaint, plaintiff acknowledged—if for no other reason than to satisfy its lawyers’ ethical obligations—that it had sufficient information to support its substantive allegations in the complaint. Thus, plaintiff’s pleadings were inconsistent, and the Court ruled that Section 220 could not be used as a substitute for litigation discovery.

Chancery Court Addresses the Meaning of a Contractual Bad Faith Claim.

In Clean Harbors, Inc. v. Safety-Kleen, Inc., C.A. No. 6177-VCP (Del. Ch. Dec. 9, 2011), the Delaware Court of Chancery declined to dismiss plaintiff’s claim that defendant Safety-Kleen, Inc. (“Safety-Kleen”) breached a contractual obligation to make a good faith determination of the fair market value of its stock in connection with the exercise of a call right set forth in an option agreement. Plaintiff Clean Harbors, Inc. (“Clean Harbors”), a competitor of Safety-Kleen, acquired shares of Safety-Kleen subject to the call right from former Safety-Kleen employees, who held Safety-Kleen options, but did not have the funds to exercise the options before they expired. Clean Harbors financed the former employees’ exercise of the options and then bought the stock from the employees for $7.50 each, a small premium. However, only several hours after Clean Harbors closed its transaction with Safety-Kleen’s former employees, Safety-Kleen notified Clean Harbor that it was exercising a call right, under the option agreement, to purchase Clean Harbor’s shares at “fair market value,” which Safety-Kleen determined was $7.50—the same price Clean Harbors paid Safety Kleen’s former employees for their stock.

Clean Harbors alleged that Safety-Kleen breached a contractual obligation to pay it the “fair market price” of the stock and an explicit obligation, under the option agreement, to make such determination in “good faith.” Specifically, Clean Harbors argued that $7.50 was a submarket price that Safety-Kleen’s former employees accepted only because they had no other means of salvaging some of the value of their options. Clean Harbors also argued that the $7.50 price reflected a discount for the stock being subject to a call right. The Court found that Clean Harbor’s allegations were sufficient to support a finding that the fair market value of the stock at issue was substantially higher than $7.50, and (2) Safety-Kleen had acted in “bad faith” in setting the call price. While Safety-Kleen argued that a contractual “bad faith” claim required Clean Harbors to establish that Safety-Kleen’s conduct constituted subjective bad faith–i.e., that its conduct was motivated by an actual intent to cause harm, the Court disagreed. Specifically, the Court found that the complaint need only allege facts related to the alleged act taken in bad faith and a plausible motivation for it. Because Clean Harbors plausibly alleged that Safety-Kleen was motivated by a desire to deprive a competitor from the benefits of its bargain (which also likely satisfied the “subjective” bad faith standard), the Court declined to dismiss its complaint.

Supreme Court Upholds Application of Spanish Law to a Triple Derivative Action.

In Sagarra Inversiones, S. L., v. Cementos Portland Valderrivas, S.A., C.A. No. 6179, J. Jacobs (Del. Dec. 28, 2011), the Delaware Supreme Court affirmed a Chancery Court decision holding that plaintiff, a stockholder of Cementos Portland Valderrivas, a Spanish Corporation (“CPV”), could not assert a derivative action on behalf of a third-tier, Delaware subsidiary of CPV where plaintiff lacked standing, under Spanish law, to bring such an action.

Under Delaware law, a stockholder of a parent corporation may sue derivatively to enforce the claim of a wholly owned corporate subsidiary where the subsidiary and its parent wrongfully refuse to enforce the subsidiary’s claim directly. Spanish law does not permit so called “double” or “triple” derivative actions—in other words, a stockholder may only pursue a derivative action at the parent level. Plaintiff failed to make a demand on the board of the Spanish parent corporation as required, under Spanish law; thus, the Chancery Court dismissed plaintiff’s complaint. Plaintiff advanced three arguments in favor of the application of Delaware law to the action. First, plaintiff argued that Delaware law should be applied because it was suing to enforce a right possessed by a Delaware corporation, not a Spanish corporation. The Court rejected this argument on the basis that plaintiff’s standing to sue derivatively on behalf of a subsidiary must derive from its ownership of shares at the parent level because the parent corporation was the only corporation in which plaintiff owned stock. Second, plaintiff argued that standing was not a principle to which Delaware’s doctrine of internal affairs (which governs choice of law issues) should have been applied. The Court disagreed and found that the pre-suit demand requirement is a matter of internal affairs because it serves a core function of substantive corporation law by allocating, as between directors and stockholders, the authority to sue on behalf of the corporation. Finally, the Court rejected plaintiff’s third argument that public policy favored application of Delaware law. The Court agreed with the plaintiff that Delaware has a strong interest in policing alleged breaches of fiduciary duties, but found that Delaware courts could only fulfill that role where their power to act was first be properly invoked.

Advice of Counsel is not Outcome Determinative in Establishing Fair Dealing.

In Encite, LLC v. Soni, C.A. No. 2476-VCG (Del. Ch. Nov. 28, 2011), the Delaware Court of Chancery denied defendant directors’motion for summary judgment on the issue whether they conducted an entirely fair auction process for the sale of a now-defunct technology start-up, Integrated Fuel Cells Technologies, Inc. (“Integrated”), where the defendants relied largely on the defense that they had solicited and followed the advice of counsel. Integrated was a venture-backed company founded by Stephen Marsh (“Marsh”) which entered into an auction process to avoid bankruptcy. The Integrated board, which was comprised of Marsh, a Marsh designee, two designees of Echelon Ventures L.P. (“Echelon”), its largest investor, and an independent director, did not hire an investment advisor to conduct the auction, but did manage to solicit some interest, including an Echelon-backed bid and a Marsh-backed bid. Ultimately, the board approved the Echelon-backed bid, and Marsh sent an e-mail to all stockholders that the board was conflicted and had ignored superior offers. After several stockholders brought derivative claims, all members of the Integrated board resigned other than Marsh, who then abandoned the auction and entered the company into bankruptcy. A Marsh affiliate then purchased Integrated’s assets in bankruptcy and brought this action against the former Integrated directors other than marsh.

Plaintiff alleged that defendants breached their fiduciary duties in approving the unconsummated transaction with an Echelon affiliate—essentially asking the Court to determine whether the defendants squandered an opportunity to realize the true value of the company by attempting to force through an inferior transaction in which they were interested. On this motion for summary judgment, defendants asked the Court to find that their actions passed muster under the exacting entire fairness standard of review applicable to interested transactions. The Court denied the motion on the basis that defendants had not set forth any evidence from which it could make that decision. Instead, the defendants relied on conclusionary statements that the process had been fair because their counsel told them it was a fair process. The Court noted that reasonable reliance on expert counsel is a pertinent factor in evaluating whether corporate directors have met a standard of fairness in their dealings with corporate powers; however, its existence is not outcome determinative.

The Court also expressed doubts about plaintiff’s ability to demonstrate damages at trial given the Court’s determination that the proper measure of damages would be the difference between Integrated’s value before the defendants resigned as directors and the value achievable by Marsh afterwards. Finding that Marsh was not required to abandon the auction or cause Integrated to enter into bankruptcy (i.e., he could have sold the assets for more) the Court rejected Marsh’s argument that the measure of damages should be the difference between what plaintiff paid for the assets in bankruptcy and the assets highest value during the bidding process.

Earn-Out Payments in Merger Agreements and the Implied Covenant.

In Winshall v. Viacom Int’l, Inc., C.A. No. 6074-CS (Del. Ch. Nov. 10, 2011), the Delaware Court of Chancery rejected plaintiff’s argument that both the seller and the acquirer of a business possessed an affirmative duty under the implied covenant of good faith and fair dealing to take an opportunity to increase the potential earn-out payments to the seller’s stockholders under a merger agreement in which the stockholders possessed no reasonable expectancy interest.

In 2006, defendant Viacom International (“Viacom”) acquired defendant Harmonix Music Systems, Inc., a creator of music-oriented gaming systems (“Harmonix”). Under a merger agreement entered into among Viacom, Harmonix and certain Harmonix stockholders in 2006, Harmonix’s stockholders were entitled to receive an up-front cash payment for their shares, as well as a contingent right to receive uncapped earn-out payments based on Harmonix’s financial performance in the two years following the merger, 2007 and 2008. About one year after the merger closed, Harmonix released a new video game, which was very successful, and Harmonix renegotiated an existing contract it had with a third party for the distribution of the game. As part of the renegotiation, Harmonix was able to obtain a wider distribution of its product and a reduction in distribution fees, in upcoming years, following the expiration of the earn-out period.

In this action, plaintiff alleged that the defendants breached the implied covenant of good faith and fair dealing by not negotiating for a reduction in distribution fees during the earn-out period. The Court found inequitable the proposed imposition of a duty on the defendants to share with Harmonix’s stockholder the benefits of a renegotiated contract addressing distribution rights after the expiration of the earn-out period. According to the Court, the implied covenant of good faith and fair dealing requires a party to refrain from conduct that is contrary to the fundamental expectations of the other party as implied by the explicit terms of the deal. In this case, plaintiff sought to actually expand “its contractual counterparty’s expectancy as a matter of judicially compelled charity, not toward a 501(c)(3), but toward another sophisticated commercial actor.” Slip. Op. at 21. Accordingly, the Court dismissed plaintiff’s
complaint.

These case summaries are intended for informational purposes only.

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The Delaware Counsel Group LLP (“DECG”) represents national and international clients in complex transactional and governance matters involving Delaware business entities. Through DECG’s exclusive focus on Delaware corporate, alternative entity and commercial law, the firm has the expertise to guide and advise law firms, in-house counsel and business people regarding sophisticated Delaware legal issues. As a result of DECG’s personalized, hands-on, team-oriented approach to lawyering, the firm’s clients find that their liability is reduced, time and money is saved, and long-term relationships that foster mutual growth opportunities are built.

Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : September 28th, 2011

Chancery Court Holds Provision Prohibiting Asset Transfer Not Violated by Sale of Equity Interest in Asset.

In Roseton OL, LLC v. Dynegy Holdings, Inc., C.A. No. 6689-VCP (Del. Ch. July 29, 2011), the Court of Chancery found that plaintiffs were not likely to succeed on the merits of their claims that Dynegy Holdings, Inc. (“DHI”) would violate promises made pursuant to clauses of guaranties it had made in favor of plaintiffs’ parent company that prohibited DHI from transferring its “properties and assets substantially as an entirety.” The asset transfer that plaintiffs claimed would violate the guaranties was a proposed transfer by DHI of its entire equity interest in subsidiaries that held DHI’s most profitable power plants to new bankruptcy remote DHI subsidiaries. The Court found that the provision at issue did not likely apply, stating its opinion that the phrase “properties and assets” referred to properties and assets directly owned by DHI, not DHI’s equity ownership interests in subsidiaries. Accordingly, the Court denied the plaintiffs’ request for a temporary restraining order.

Chancery Courts Denies Motion to Expedite Conflict Transaction Negotiated by Special Committee Except on Limited Disclosure Grounds.

In a recent decision on a motion to expedite, In re Ness Technologies, Inc. S’holders Litig., C.A. No. 6569-VCN (Del. Ch. Aug. 3, 2011), the Delaware Court of Chancery confirmed that a conflict transaction negotiated by a fully functioning special committee would not be second-guessed by the Court. This decision involved a putative class action lawsuit filed by stockholders of defendant Ness Technologies (“Ness”), who sought to enjoin a proposed transaction through which Ness’s largest stockholder, defendant Citi Venture Capital International (“CVCI”), would acquire Ness in a cash transaction at $7.75 per share. The Plaintiffs challenged the transaction on both price and process grounds and also alleged that the disclosures by Ness relating to the proposed transaction were inadequate. The Court found that the plaintiffs had not articulated sufficiently colorable price or process claims to justify expedition where: (1) the transaction had been approved by a disinterested special committee following an eleven-month sales’ process involving approximately thirty bidders; and (2) the parties merger agreement contained “relatively mundane” deal protection measures (standard “no-shop” and “no talk” provisions with fiduciary-outs and a termination fee amounting to 2.72 % of the transaction price). However, consistent with recent decisions emphasizing the importance of financial advisor independence, the Court granted the plaintiffs’ motion to expedite on the limited issue whether Ness’s financial advisor was conflicted due to past, present or future dealings with CVCI.

Chancery Court Interprets LLC Agreement to Allow Transfer of Membership Interests Without Consent of All Members

In Achaian, Inc. v. Leemon Family, LLC, et al., C.A. No. 6261-CS (Del. Ch. Aug. 9, 2011), the Court of Chancery granted a declaratory judgment in favor of Achaian, Inc. (“Achaian”), a member of Omniglow, LLC (“Omniglow”) and ordered the dissolution of Omniglow under 6 Del. C. § 18-802 based on a 50/50 deadlock between the members of Omniglow. In determining that Omniglow was owned by two members each with a 50% limited liability company interest, the Court rejected the other member’s claims that a provision prohibiting the admission of new members without all members’ consent would prohibit one member from transferring its interest to another member without all members’ consent. The Court noted that Omniglow’s LLC agreement explicitly permitted a member to transfer “all or any portion of its [i]nterest in [Omniglow] to any [p]erson at any time,” and in granting judgment in favor of Achaian, the Court opined that it “would make scant sense” to transfer only economic rights and not the entire interest in Omniglow, including voting rights, as the definition of “Interest” in the LLC agreement referred to the “entire ownership interest of the [m]ember in [Omniglow].”

Delaware Supreme Court Affirms Chancery Court Decision on Indemnification for Contingency Fees.

In IAC/Interactive Corp., v. Brien, C.A. No. 629, 2010 (Del. Ch. Aug. 11, 2011), the Delaware Supreme Court affirmed the Court of Chancery’s determination that contingent fees are fees that are “incurred” for purposes of Section 145 of the Delaware General Corporation Law (“Section 145”), such that a corporation is required to indemnify a person otherwise entitled to be indemnified under Section 145 for reasonable contingent fees. In so finding, the Court rejected the defendant corporation’s argument that premium or contingent fees are not fees that are actually “incurred” because they do not represent work done, but rather the success achieved. The Court found that whether the amount of the fee was determined upfront or after the result was obtained was immaterial because the fee was still incurred. The Court also found that the Court of Chancery had not abused its discretion in finding reasonable the following contingent fee arrangements: (1) a 20% success fee to one firm who was defending the indemnified person in an arbitration proceeding; (2) a $100 per hour increase is the same firm’s hourly rates for all work done after the arbitration was completed; (3) a 50% premium above standard hourly rates to a second firm; and (4) a contingent $100 per hour premium above standard hourly rates to a third firm.

Chancery Court Prohibits Hedge Fund Manager’s Use of Gate Provision to Restrict Withdrawal of Capital under Revenue Sharing Agreement

In Paige Capital Management, LLC, et al. v. Lerner Master Fund, LLC, et al., C.A. No. 5502-CS (Del. Ch. Aug. 8, 2011), the Court of Chancery refused to permit the management of a hedge fund (the “Paige Fund”) to use a so-called “Gate Provision” of a partnership agreement (the “Partnership Agreement”) to restrict the withdrawal by the Paige Fund’s only outside investor of its entire investment, pursuant to the terms of its revenue sharing agreement (the “Seeder Agreement”). In October 2007, an investment vehicle called the Lerner Fund agreed to invest $40 million of “seed” capital into the newly created Paige Fund. The Lerner Fund entered into the Partnership Agreement through one of the Paige Fund’s investment vehicles, as well as the Seeder Agreement, which governed the relationship between the Paige Fund and the Lerner Fund, to the exclusion of any other potential limited partners. After three years and no new investors, the Lerner Fund decided to withdraw its entire capital investment, pursuant to the terms of the Seeder Agreement. However, the Paige Fund attempted to restrict this withdrawal, based on a “Gate Provision” contained in the Partnership Agreement that permitted the general partner to limit the withdrawal of any limited partners’ investments to 20% of the total capital investments. The Paige Fund argued that the Partnership Agreement had not been “amended” by the provisions of the Seeder Agreement, while the Lerner Fund argued that no amendments were necessary since the Partnership Agreement permitted the general partner to waive the Gate Provision. The Court, using New York law contract analysis, agreed with the Lerner Fund that the Gate Provision was superseded by the Seeder Agreement and that the Seeder Agreement was tantamount to a side letter between the general partner and the Lerner Fund, and that even had it not been, the fiduciary duties of the Paige Fund’s general partner would have required it to waive the Gate Provision. After a lengthy analysis, the Court found that with respect to Section 17-1101(e) of the Delaware Revised Uniform Limited Partnership Act (DRULPA), the general partner of the Paige Fund and the managing member of the general partner had breached their fiduciary duties by favoring their own interests over those of the investor in invoking the Gate Provision.

Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : August 3rd, 2011

No evidence that annual meetings held six months apart meant to thwart shareholder franchise

In Goggin v. Vermillion, Inc., C.A. No. 6465-VCN (Del. Ch. June 3, 2011), the Delaware Court of Chancery declined to enjoin the annual meeting of a Delaware corporation, notwithstanding that the meeting would be held only six months after the prior year’s annual meeting, in the absence of evidence that the scheduling of the meeting was intended to thwart the shareholder franchise. The Court also held that the scheduling of the annual meeting did not violate the Delaware Supreme Court’s ruling in Airgas Inc. v. Air Products and Chemicals Inc., C.A. No. 5817 (Del. Nov. 23, 2010), because it would truncate the terms of only one class of directors and for only a few days. Finally, the Court declined to enjoin the company’s adoption of a rights plan and advance notice bylaws where there was no evidence that the adoption of these defensive measures was motivated by entrenchment.

Written assurances that sale process would be “fair” did not mean entire fairness standard should be used in partnership context

In In re Cencom Cable Income Partners, L.P. Litig., C.A. No. 14634-VCN (Del. Ch. June 6, 2011), the Court of Chancery, in granting a motion to dismiss, held that a disclosure statement for the sale of a partnership that said independent counsel was retained to assure the process was “fair” to the limited partners, did not mean that a challenge to the sale process on fiduciary grounds should be evaluated under the entire fairness standard from Delaware corporate jurisprudence. According to the Court, the mere use of the word “fair” in a disclosure statement did not alter the standard established in the partnership agreement that contained no requirement that the transaction be determined to be fair. “Presumably, carrying out the obligations owed to the Limited Partners, as measured by the Partnership Agreement, would be, within that context, fair,” the Court said, provided that there was nothing “inherently or fundamentally” unfair about the transaction at issue.

Disgorgement is a proper equitable remedy for an insider trading claim even if the corporation was not harmed

In Kahn, et al. v. Kohlberg Kravis Roberts & Co., L.P., et al., C.A. No. 1808 (Del. June 20, 2011), a derivative action brought by shareholders of Primedia Inc., the Delaware Supreme Court reversed a decision by the Chancery Court to dismiss the case on the basis that the remedy sought (disgorgement) was unavailable under an earlier Chancery Court decision in Pfeiffer v. Toll, 989 A.2d 683 (Del. Ch. 2010). Pfeiffer held that disgorgement is not an appropriate remedy for a claim of insider trading, absent a showing that the corporation suffered actual harm. In Kahn, the Supreme Court rejected the Chancery Court’s prior ruling in Pfeiffer, holding that even if the corporation did not suffer actual harm, “equity requires disgorgement of that profit.” The Supreme Court agreed with the Chancery Court that the special litigation committee that moved to dismiss the claim in Kahn had investigated the matter with the requisite thoroughness and independence, but because the Supreme Court could not judge from the record whether the Chancery Court had granted the motion to dismiss solely in reliance on its holding in Pfeiffer, it remanded the case to the Chancery Court.

Delaware General Assembly Amends LLC, LP and GP Acts for 2011

Posted : July 20th, 2011

Building a Better Mousetrap: Delaware General Assembly Amends LLC, Limited Partnership and General Partnership Acts for 2011

by Scott L. Matthews and Elizabeth M. Bennett, The Delaware Counsel Group LLP

Scott L. Matthews is Counsel at The Delaware Counsel Group, where he focuses on Delaware corporate and alternative entity advice and commercial transactions. Elizabeth M. Bennett is a Summer Associate at The Delaware Counsel Group, and a former correspondent for DLW.

As the cool breezes and festivals of spring give way to summer heat, it can mean only one thing in Delaware: amendments to the state’s cutting-edge Limited Liability Company Act, or LLC Act, Delaware Revised Uniform Limited Partnership Act, or DRULPA, and the Delaware Revised Uniform Partnership Act, or DRUPA. On June 23, 2011, the Delaware General Assembly passed another round of amendments to these important alternative business entity statutes in order to keep them current and maintain their “national preeminence,” as noted in the synopses. The amendments were signed by Governor Jack Markell on July 7, 2011 and take effect Aug. 1, 2011.

Each of the LLC Act, DRULPA and DRUPA was amended to add a new subsection confirming that a certificate of correction may be filed to “correct” a certificate of cancellation that has been filed prior to the dissolution or the completion of winding up of the entity. A primary example of the utility of such a provision is the circumstance where members or partners of a terminated entity discover an asset, and want to revive the entity solely for the purpose of distributing such asset in accordance with the applicable statute.

The LLC Act, DRULPA and DRUPA were also amended to clarify that members or managers of an LLC, or partners, limited partners or general partners of a partnership, according to the respective statutes, may consent to an action in writing or by electronic transmission, without such writing or transmission restating the subject matter of the consent, unlike stockholders of a Delaware corporation, who under the General Corporation Law of the State of Delaware, or DGCL, must include a restatement of the subject matter of the consent when consenting to an action via electronic transmission.

Perhaps most notably, the LLC Act, DRULPA and DRUPA were revised to statutorily adopt a rule different from the result of the 2004 Court of Chancery case In re LJM2 Co-Investment, L.P. Limited Partners Litigation, in which the Court said that the “general power of amendment is subject to limitations, including, pertinently, a requirement for supermajority approval of any provision that requires supermajority consent to take action.”

These statutory changes establish that provisions stating that a supermajority vote is required to amend apply only to those provisions that are expressly included in the partnership or LLC agreement of the entity, and do not apply to default voting provisions of the applicable entity statute unless otherwise provided in the partnership or LLC agreement. These revisions to the statutes are not intended to affect the interpretation of such supermajority amendment requirement clauses as applied to the express language of the partnership or LLC agreement.

In addition, the LLC Act was amended to provide a default amendment rule for entities whose certificate of formation is filed on or after Jan. 1, 2012. The default rule now requires the unanimous consent of all members to amend the LLC agreement. Previously, the statute did not specifically identify who could amend the LLC agreement if there was not a relevant amendment provision contained in the LLC agreement, and it was not clear whether managers or other non-member parties to the LLC agreement were required to consent.

Finally, the DRUPA was amended to confirm that a partner of an LLP is not personally responsible for liabilities arising from circumstances or events occurring while the partnership is a limited liability partnership. The prior language of the statute with regard to limitation of liability referred solely to obligations incurred while a partnership is a limited liability partnership, and the revision now confirms that a partner is protected from such personal liability even if the liability is incurred after the relevant partnership ceases to be a limited liability partnership, so long as the circumstances or events creating the liability occurred while such partnership was a limited liability partnership.

The LLC Act, DRULPA and DRUPA were also amended significantly to address certain administrative and record-keeping concerns of various constituencies.

Amendments were adopted to provide that a General Partnership, or GP, a Limited Partnership, or LP, or an LLC may only register with the Secretary of State of the State of Delaware, or SOS, if the name of the entity serves to distinguish it upon the records of the SOS from the name upon such records of another domestic entity of the same type. Entities with certificates on file as of July 31, 2011, are grandfathered in and need not amend their registrations. Previously, for example, an LLC could be formed under the name ABC LLC, even if there was previously anotherDelawareentity called ABC LLC, provided that the party forming the new ABC LLC obtained consent from the relevant authorizing parties of the former ABC LLC. The relevant provisions of the three acts continue to allow for authorizing parties of an existing entity of another type, or a foreign entity of the same type, to consent to the use of a name that is not such as to distinguish the new entity from the existing entity in the SOS’s filing system – e.g., ABC LLC, a Pennsylvania LLC registered to do business in Delaware as a foreign limited liability company, may consent to the use of the name ABC LLC by a new Delaware LLC.

This amendment prevents the circumstance of an entity being terminated under one name followed by another entity being formed later under the same name, which can create confusion among various constituencies, including the SOS, law firms and clients.

The LLC Act, DRULPA and DRUPA were also amended to provide that the address of a registered agent or registered office must include a postal code. While existing filings need not be amended, a postal code will now be now required any time a new filing is made that references a registered agent or office.

To address another record-keeping issue, the LLC Act, DRULPA and DRUPA were amended to provide that, for filings made on or after Jan. 1, 2012, a certificate cannot have a future effective date later than 180 days from the date of filing.

In addition, the LLC Act, DRULPA and DRUPA were amended to clarify that a certificate of domestication and a certificate of formation or limited partnership, or statement of partnership existence, as applicable, must be filed simultaneously when domesticating a foreign LLC, LP or GP, and if such filings contain a future effective date, the dates must be identical. A similar amendment was made to the same statutes with respect to conversion of a Delaware entity to a LLC, LP or GP, clarifying that a certificate of conversion and a certificate of formation or limited partnership, or statement of partnership existence, as the case may be, must be filed simultaneously with the SOS.

Each of the three statutes was amended to provide that an agent may resign as registered agent for multiple entities by filing a single certificate, and the fee for each additional entity after the first will be $2. The fee for the initial entity remains $200. There is also a new $50 fee for a filing that only changes the registered agent and registered office of a Delaware GP, LP or LLC.

Finally, DRUPA was amended to clarify that a Statement of Partnership Existence for a GP and a Statement of Qualification for an LLP must be cancelled separately and that cancellation of one does not of itself cancel the other.

These statutory improvements, updates and clarifications will help to ensure that Delaware’s pre-eminent role in crafting business entity statutes that are simultaneously immensely practical, comprehensive and coherent is maintained for years to come. Building a better mousetrap, indeed, is a continuing process, and stakeholders in Delaware, while extolling this year’s round of augmentations, are already considering what the future holds for Delaware LLCs and partnerships.

Summary of 2011 Amendments to Key Delaware Business Entity Statutes

Posted : July 19th, 2011

Amendments to the Delaware Alternative Entity Statutes.

The Delaware Limited Liability Company Act (the “LLC Act”), the Delaware Statutory Trust Act (the “DSTA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”), and the Delaware Revised Uniform Partnership Act (“DRUPA” and, together with the LLC Act, the DSTA and DRULPA, the “Alternative Entity Statutes”) have been amended to provide that a LLC, statutory trust, limited partnership or general partnership may not register under a name that is not such as to distinguish it upon the records of the office of the Secretary of State from the name on such records of another domestic entity of the same type, provided that those on file as of July 31, 2011 are grandfathered in. (This is to prevent the case of an entity being terminated under one name and then another entity later being formed under the same name, which apparently creates confusion at the SOS.) For example, if there is an entity called ABC LLC, a Delaware limited liability company (“ABC LLC Delaware”), on the records of the Secretary of State, then: ABC LLC, an Alabama limited liability company, may register to do business in Delaware as a foreign limited liability company, with the consent of ABC LLC Delaware; ABC Corporation may be formed as a Delaware corporation, with the consent of ABC LLC Delaware; but another ABC LLC may not be formed in Delaware even with the consent of ABC LLC Delaware. A companion amendment to each statute is being made to clarify that existing filings need not be amended, but any time a new filing is made that references a registered agent or office, the postal code must be included.

The Alternative Entity Statutes have been amended to provide that, for filings made on or after January 1, 2012, a certificate cannot have a future effective date later than 180 days from the date of filing. This addresses a Secretary of State record-keeping concern.

The Alternative Entity Statutes have been amended to provide that an agent may resign as registered agent for multiple entities by filing a single certificate, and the fee for each additional entity after the first will be $2. In addition, the DSTA has been amended to provide that a registered agent may resign with or without appointing an agent (though if such resignation is made without appointing a successor registered agent, it shall not become effective until 30 days after the certificate of resignation is filed, and in addition, must include a certification that the resigning agent provided written notice of such resignation at least 30 days prior to the filing of the certificate).

Amendments to All Entity Statutes

Each of the Alternative Entity Statutes, as well as the Delaware General Corporation Law (the, “DGCL,” and together with the Alternative Entity Statutes, the “Entity Statutes”), has been amended to provide that, effective August 1, 2011, the address of a registered agent or registered office (or, in the case of a statutory trust, a trustee) must include a postal code. Each of the Entity Statutes provides that the new requirement only applies to newly-filed certificates referencing a registered agent, registered office or trustee, and that existing certificates need not be amended solely to comply with the new requirement.

Each of the Entity Statutes has been amended to clarify that a certificate of domestication or certificate of conversion, on the one hand, and a certificate of incorporation/trust/formation/limited partnership or statement of partnership existence, on the other hand, must be filed simultaneously and if there is a future effective date and time such time must be identical.

Other Amendments to the DGCL

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.

A number of minor changes were made to certain sections of the DGCL governing specific types of corporations, such as foreign and tax-exempt corporations. For example, an exception to the requirement that the name of a corporation contain certain words or abbreviations that identifies it as such, including “inc.” and “corp.” was added to Section 102 of the DGCL for corporations that are both nonstock corporations and professional associations. Similarly, Sections 102 and 395 were amended to allow the Director of the Division of Corporations and the State Banking Commissioner to waive certain restrictions on corporations that contain the word “trust” in their names, such as the requirement that such corporations file reports with the State Bank Commissioner, where the corporation is not regulated under The Bank Holding Act of 1956 or Section 10 of the Home Owners’ Loan Act.

Conforming changes were made to Sections 313, 391 and 501 of the DGCL to take into account last year’s amendment to Section 501 of the DGCL classifying corporations that do not pay franchise taxes as “exempt corporations.” The definition of “exempt corporation” in Section 501 was also clarified to confirm that captive insurance companies and certain purely charitable and educational associations are “exempt corporations.”

Other Amendments to the Alternative Entity Statutes

The LLC Act, DRULPA and DRUPA have been amended to provide for a new $50 filing fee for a filing that only changes the registered agent and registered office of the entity.

DRUPA has been amended to provide that a Statement of Partnership Existence and a Statement of Qualification of a limited liability partnership must be cancelled separately and that cancellation of one does not of itself cancel the other.

The LLC Act, DRULPA and DRUPA have been amended to add a new subsection confirming that a certificate of correction may be filed to “correct” a certificate of cancellation that has been filed prior to the dissolution or the completion of winding up of the entity.

The LLC Act, DRULPA and DRUPA have been amended to clarify that members, managers, partners, limited partners or general partners, respectively, may consent to an action in writing or by electronic transmission, without such writing or transmission restating the subject matter of the consent (as in the DGCL).

The LLC Act, DRULPA and DRUPA have been amended to provide a result different from that articulated by the Chancery Court in In re LJM2 Co-Investment, L.P. Limited Partners Litigation, 866 A.2d 762 (Del. Ch. 2004). The amendments apply to provisions of a partnership or LLC agreement that require, where a supermajority vote is required for an action, that such a vote is required to amend. The amendments provide that such amendment provisions only apply to provisions expressly included in the partnership or LLC agreement and do not apply to default voting provisions of the applicable entity statute unless otherwise provided in the partnership or LLC agreement. The amendments are not intended to affect the interpretation of such amendment provisions as applied to provisions expressly included in the partnership or LLC agreement.

The LLC Act has been amended to provide a default rule for amendment of the LLC agreement of any LLC whose certificate of formation is filed on or after January 1, 2012. The default rule will now be unanimous consent of all members. (The problem was that the statute did not delineate who could amend if there was not an express amendment provision in the LLC Agreement, and it is not clear whether managers or other non-members must consent or not.)

DRUPA has been amended to confirm that a partner of an LLP is not personally liable for liabilities arising from circumstances or events occurring while the partnership is a limited liability partnership. The former rule simply addressed liabilities incurred while the GP has LLP status.

The DSTA was amended to provide that an agreement of merger adopted in accordance with the DSTA may amend the governing instrument of the trust or may provide for the adoption of a new governing instrument of the surviving or resulting trust.

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