As many lawyers know, most European jurisdictions have de-merger laws that allow for the relatively straightforward partition of a legal entity into two or more entities, with each surviving entity entitled to all assets, rights, liabilities and duties allocated to it upon the satisfaction of certain formalities. Such laws have facilitated the implementation of corporate reorganizations, such as supply chain restructurings or spin-offs, by allowing the division of a legal entity's different departments, such as distribution and manufacturing units, into separate legal entities without the need to comply with onerous notice, filing or registration requirements. Until recently, however, there was not a very user-friendly counterpart under US law. On 1 August, Delaware enacted amendments to the Delaware Limited Liability Company Act that changed the landscape in the US.
Pursuant to the new law, a Delaware limited liability company ('LLC') may divide into two or more Delaware LLCs by adopting a plan of division, and thereafter filing a certificate of division (by each surviving company), and simultaneously therewith filing a certificate of formation if a dividing company is a new entity. Finally, any newly created LLCs will need to adopt a new LLC agreement, and the original dividing entity, if it survives, might need to amend its current LLC agreement or adopt a new agreement. The new law allows two options: (i) the electing LLC may divide into two or more newly formed Delaware LLCs that would be the surviving entities, or (ii) the electing LLC would survive the division and retain certain assets, liabilities and duties and allocate other assets, liabilities and duties to one or more newly formed Delaware LLCs.
Pursuant to the plan of division, the dividing entities are allowed to allocate the assets, property, rights, debts, liabilities and duties among themselves as appropriate, and no other dividing entity will be liable for such obligations unless the plan of division constitutes a fraudulent transfer. Debts and liabilities that are not allocated by the plan of division, or are allocated pursuant to a division that constitutes a fraudulent transfer, shall be deemed the joint and several debts and liabilities of all of the dividing LLCs. Additionally, any action or proceeding pending against a dividing company may be continued against its survivor. The plan of division does not need to list each individual property, right, asset or liability, so long as such right, asset or liability can be reasonably identified by any objectively determinable method. Additionally, the plan of division does not need to be publicly filed, rather a designated contact within the dividing LLC shall keep a copy of the plan of division for a period of six years following the plan's effective date, during which time such contact shall provide, upon written request of any creditor of a dividing LLC, the name and business address of the dividing LLC to which the claim of such creditor was allocated pursuant to the plan.
The new law stresses that the allocation of assets, liabilities and duties shall not be deemed a transfer or assignment and may occur without the need for any further action, thus potentially avoiding transfer taxes and the need for notices or consents for transfer. Additionally, the allocation of assets and liabilities may occur without the requirement of the dividing LLC to wind up its affairs or distribute its assets, and such a division shall not constitute a dissolution of such LLC. Finally, the law has a protective provision that states that if the dividing company is party to an agreement effective prior to August 1, 2018 that prohibits the agreement's transfer through the consummation of a merger or consolidation by combining the company with or into another party, then such restriction shall apply to a division as if it were a merger, consolidation or transfer of assets. However, parties that enter into contracts with Delaware LLCs after 1 August 2018 and who wish to restrict the transfer of the contract through a division, will need to expressly insert such prohibition in the contract.
The new law clearly provides a valuable tool in corporate reorganizations. For projects such as spin-offs, carve-outs and supply chain reorganizations, it is now possible to effect the transfer of a division or other distinct business in a Delaware LLC without the need to form newcos and separately transfer assets and liabilities. Also, it is possible that licenses and permits can be transferred by operation of law, unless there is a restriction against transfers as a result of mergers (or against divisions if after 1 August 2018). Obviously the biggest limitation with this change in law is that it only applies to Delaware LLCs, and not to other Delaware legal entities or other state entities. Additionally the dividing newcos will need to be Delaware LLCs as well. However, hopefully one day this limitation will disappear as other states enact similar legislation.