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Amendments to Delaware's LLC and Partnership Acts Adopted

July 17, 2020

Delaware has recently adopted legislation amending the Delaware Limited Liability Company Act (LLC Act), the Delaware Revised Uniform Limited Partnership Act (LP Act) and the Delaware Revised Uniform Partnership Act (GP Act) (collectively, the LLC and Partnership Acts). The following is a brief summary of some of the more significant amendments that affect Delaware limited liability companies (Delaware LLCs), Delaware limited partnerships (Delaware LPs) and Delaware general partnerships (Delaware GPs), including amendments (i) confirming that no statutory appraisal rights are available for Delaware LLCs, LPs or GPs, (ii) providing flexibility in connection with the admission of a member to a Delaware LLC or a limited partner to a Delaware LP, (iii) allowing additional information to be included in a certificate of division, (iv) addressing the execution of documents and electronic recordkeeping, (v) clarifying matters relating to registered series of a Delaware LLC or LP, and (vi) identifying the types of foreign entities that may serve as a Delaware registered agent.

No Statutory Appraisal Rights

The LLC and Partnership Acts permit a Delaware LLC, LP and GP to provide for contractual appraisal rights with respect to a limited liability company interest or partnership interest (or other interest), as applicable, in a limited liability company agreement, a partnership agreement, an agreement of merger or consolidation, a plan of merger or a plan of division, as applicable.

The LLC and Partnership Acts have been amended to confirm that appraisal rights are not available unless otherwise expressly contractually provided for in a limited liability company agreement, a partnership agreement, an agreement of merger or consolidation, a plan of merger or a plan of division, as applicable. The amendments also confirm and clarify this intent by amending the titles of Section 18-210 of the LLC Act, Section 17-212 of the LP Act and Section 15-120 of the GP Act from "Contractual appraisal rights" to "No statutory appraisal rights."

Flexibility for Admission of Members and Limited Partners

The LLC and LP Acts have been amended to (i) confirm that a limited liability company agreement or partnership agreement may provide for the admission of members or limited partners, as applicable, in connection with the formation of a Delaware LLC or LP, and (ii) eliminate any statutory requirement and technical pitfall that a member's or limited partner's admission to a Delaware LLC or LP after its formation be subject to the admission being reflected in the records of the Delaware LLC or LP.

The amendments also clarify that after the formation of a Delaware LLC or LP, admission of assignees as provided in Section 18-704(a) of the LLC Act (Right of assignee to become member) or Section 17-704(a) of the LP Act (Right of assignee to become limited partner) is not subject to the admission being reflected in the records of the Delaware LLC or LP.

These amendments de-emphasize technical recordkeeping requirements in connection with the admission of a member to a Delaware LLC or a limited partner to a Delaware LP. Instead, the amendments clarify and re-emphasize the foundational policy of both the LLC and the LP Acts to give maximum effect to the principle of freedom of contract and enforce the terms of limited liability company agreements and partnership agreements (including terms addressing the admission of members to Delaware LLCs and limited partners of Delaware LPs).

Flexibility in Information Provided in Certificates of Division

The LLC Act was amended in 2018 and the LP Act was amended in 2019 to permit a single Delaware LLC or a single Delaware LP, as applicable, to divide into two or more Delaware LLCs or Delaware LPs, respectively. The original dividing Delaware LLC or LP may continue its existence or terminate as a result of such division. In connection with a division, (i) a dividing Delaware LLC or LP must adopt a plan of division setting forth the terms and conditions of the division, including the allocation of assets, property, rights, series, debts, liabilities and duties of such dividing Delaware LLC or LP among the resulting Delaware LLCs or LPs of the division (which may include a dividing Delaware LLC or LP, if not terminated as a result of the division), the name of each resulting Delaware LLC or LP and, if the dividing Delaware LLC or LP will survive the division, the name of such surviving Delaware LLC or LP; and (ii) the dividing Delaware LLC or LP must file with the Delaware Secretary of State (a) a certificate of division and (b) a certificate of formation or certificate of limited partnership for each resulting Delaware LLC or LP of the division.

A certificate of division filed with the Delaware Secretary of State is required to state the following: (i) the name of the dividing Delaware LLC or LP and, if its name been changed, the name under which its certificate of formation or certificate of limited partnership, as applicable, was originally filed, and whether the dividing Delaware LLC or LP is surviving the division; (ii) the date of filing of the dividing Delaware LLC's or LP's original certificate of formation or certificate of limited partnership, as applicable, with the Delaware Secretary of State; (iii) the name of the surviving Delaware LLC or LP, if any, and each resulting Delaware LLC or LP formed as a consequence of the division; (iv) the name and business address of the division contact; (v) the future effective date or time of the division (which shall be a date or time certain) if it is not to be effective upon the filing of the certificate of division; (vi) that the division has been approved in accordance with Section 18-217 of the LLC Act or Section 17-220 of the LP Act, as applicable; (vii) that the plan of division is on file at a place of business of such division company or division partnership, as applicable, as is specified therein, and the address thereof; and (viii) that a copy of the plan of division will be furnished by such division company or division partnership, as applicable, as is specific therein, on request and without cost, to any member or partner, as applicable, of the dividing Delaware LLC or LP.

The LLC and LP Acts have been amended to specifically provide flexibility to state additional information in a certificate of division by modifying the aforementioned list of required statements to be included in a certificate of division to also permit the dividing entity to include "any other information the dividing [Delaware LLC or LP] determines to include" in a certificate of division.

Execution of Documents

The LLC and Partnership Acts were amended in 2019 to include the addition of provisions relating to the execution of documents by electronic signature and delivery of documents by electronic transmission (collectively, the Electronic Signature and Delivery Provisions). The Electronic Signature and Delivery Provisions explicitly state that any act or transaction contemplated or governed by the LLC and Partnership Acts or a limited liability company agreement or partnership agreement may be provided for in a document, and an electronic transmission will be deemed the equivalent of a written document. The term "document" is defined to mean "(i) any tangible medium on which information is inscribed, and includes handwritten, typed, printed or similar instruments, and copies of such instruments and (ii) an electronic transmission." The term "electronic transmission" is defined as "any form of communication not directly involving the physical transmission of paper, including the use of, or participation in, 1 or more electronic networks or databases (including 1 or more distributed electronic networks or databases), that creates a record that may be retained, retrieved and reviewed by a recipient thereof and that may be directly reproduced in paper form by such a recipient through an automated process."

Whenever the LLC and Partnership Acts or a limited liability company agreement or partnership agreement require or permit a signature, an electronic signature is a permissible mode of executing a document. An electronic signature is defined as an "electronic symbol or process that is attached to, or logically associated with, a document and executed or adopted by a person with an intent to execute, authenticate or adopt the document."

The Electronic Signature and Delivery Provisions have been amended to clarify that a person may "execute" a document by using any type of signature contemplated by the LLC and Partnership Acts, which includes both "wet ink" signatures and electronic signatures.

Electronic Recordkeeping

In recent years the LLC and Partnership Acts were amended to provide express statutory authority for Delaware LLCs, LPs and GPs to use networks of electronic databases (including blockchain and distributed ledgers) for the creation and maintenance of records and for certain electronic transmissions. This has helped facilitate and accommodate the myriad of uses for these burgeoning technologies in the governance and activities of Delaware LLCs, LPs and GPs.

The LLC and Partnership Acts previously provided that a Delaware LLC, LP and GP may maintain its books and records and other information in other than a "written form," including on, by means of, or in the form of any information storage device, method or one or more electronic networks or databases, as long as such form is capable of conversion into "written form" within a reasonable time. Section 18-305(d) of the LLC Act (Access to and confidentiality of information; records), Section 17-305 of the LP Act (Access to and confidentiality of information) and Section 15-403 of the GP Act (Partner's rights and duties with respect to information) have each been amended to replace the term "written form" used therein with the term "paper form." This change reinforces, and further clarifies, that a Delaware LLC, LP or GP may maintain its books and records and other information in a form other than a physical form (including electronic form) if such form is capable of conversion into paper form within a reasonable time. These amendments to the LLC and Partnership Acts aim to precisely distinguish electronic records from physical records.

Clarifications for Registered Series

The LLC and the LP Acts were each amended in recent years to permit a new type of series known as a "registered series." A registered series qualifies as a registered organization under the Uniform Commercial Code that facilitates the use of a Delaware LLC or LP in secured financing transactions. One requirement of a registered series is that the name of a registered series must begin with the name of the Delaware LLC or LP and be distinguishable upon the records of the Delaware Secretary of State from any entity or other registered series formed or qualified to do business in Delaware. The LLC and the LP Acts have been amended to clarify that the name of a registered series must be different from any entity or other registered series of a Delaware LLC or registered series of a Delaware LP.

The LLC and the LP Acts also require a certificate of registered series to be amended promptly when any statement in a certificate of registered series was false when made or when any matter described in a certificate of registered series has changed in such a way that makes the certificate of registered series false in any material respect. The LLC and the LP Acts have been amended to confirm that a certificate of registered series shall also be promptly amended when the name of a registered series as set forth in its certificate of registered series no longer begins with the name of the applicable Delaware LLC or LP.

Foreign Entities as Delaware Registered Agents

Every (i) Delaware LLC, (ii) Delaware LP, (iii) Delaware GP that files a statement of partnership existence or a statement of qualification, (iv) foreign limited liability company or foreign limited partnership registered to do business in the State of Delaware, or (v) foreign general partnership or foreign limited liability partnership that has filed a statement of foreign qualification (collectively, the Entities) is required to maintain a registered agent in the State of Delaware. The registered agent accepts service of process on behalf of such Entities in the State of Delaware. The LLC and Partnership Acts have been amended to identify the appropriate types of foreign entities that may serve as registered agent of such Entities (including a foreign corporation, a foreign limited liability partnership, a foreign limited partnership (including a foreign limited liability limited partnership), a foreign limited liability company or a foreign statutory trust). The amendments also clarify that a foreign general partnership may not serve as a Delaware registered agent.

These amendments reflect Delaware's continuing commitment to maintaining statutes governing Delaware LLCs, LPs and GPs that effectively serve the business needs of the national and international business communities. The amendments to the LLC, LP and GP Acts are contained in House Bill Nos. 344, 343 and 342, respectively (each effective upon their enactment into law on July 16, 2020).

If you have any questions about this Delaware LLC & Partnership Law Update or other legal issues, please contact a Richards, Layton & Finger attorney.