On July 7, 2011, Delaware’s Governor, Jack Markell, signed into law bills amending several of Delaware’s renowned alternative business entity statutes, namely, the Delaware Revised Uniform Partnership Act, 6 Del. C. § 15-101, et seq. (“DRUPA”), the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-101, et seq. (“DRULPA”), and the Delaware Limited Liability Company Act, 6 Del. C. § 18-101, et seq. (“DLLCA” and collectively with DRUPA and DRULPA, the “Alternative Entity Statutes”). The amendments to the Alternative Entity Statutes (the “Alternative Entity Amendments”) represent a continuing effort by Delaware to create a flexible statutory framework for alternative business organizations. The balance of this article will touch upon some of the more significant amendments to the Alternative Entity Statutes. Each of these amendments is effective as of August 1, 2011.

Amending Agreements — Special Types of Amendment Provisions and Limited Liability Company Agreements without Amendment Provisions

The Alternative Entity Statutes have been amended to adopt a rule different from the approach that the Delaware Court of Chancery followed in In re LJM2 Co-Investment, L.P. Limited Partners Litigation, 866 A.2d 762 (Del. Ch. 2004) (“LJM2”), for a special type of amendment provision in partnership agreements and limited liability company agreements. More particularly, the special type of amendment provision involved is one which specifies that any provision of a partnership agreement or limited liability company agreement can be amended by a particular vote, unless the provision being amended is a provision that requires a higher vote for the taking of the action referred to in such provision, in which case an amendment to such provision shall require the same higher vote.

In LJM2, the Court of Chancery analyzed, among other things, a limited partnership agreement containing the following amendment provision:

The Majority Limited Partners may, with the concurrence of the General Partner, vote to amend this Agreement in any respect; provided . . . that no amendments to this Agreement may change the percentage in Interest of Limited Partners (the “Required Interest”) necessary for any consent required hereunder to the taking of an action unless such amendment is approved by a percentage in Interest of Limited Partners that is not less than the Required Interest at such time . . . .

This amendment provision was being considered as it applied to a purported amendment adopted to override a statutory default rule contained in Section 17-502(b)(1) of DRULPA, which provides:

Unless otherwise provided in the partnership agreement, the obligation of a partner to make a contribution or return money or other property paid or distributed in violation of this chapter may be compromised only by the consent of all of the partners.

The Court of Chancery held that the default unanimity requirement contained in Section 17-502(b) (1) of DRULPA was “required hereunder” within the meaning of the amendment provision, because, in the court’s words, “[b]y choosing to include no express [override of 17-502(b)(1) in the partnership agreement], the parties to that agreement understood that the default rule of unanimity would govern their relations . . . . Indeed, that rule became as much a part of their contract as any express provision of that agreement . . . .”

While the court’s decision in LJM2 was, perhaps, a logical one, it was contrary to the way that most Delaware practitioners and the drafters of DRULPA expected the issue would be decided. To resolve this concern, the Alternative Entity Amendments clarify that the type of amendment provision in LJM2 only applies to the provisions expressly set forth in the partnership agreement or limited liability company agreement. Unless otherwise provided in the partnership agreement or limited liability company agreement, such special type of amendment provision does not apply to provisions of the Alternative Entity Statutes that might be applicable to a particular partnership or limited liability company by default. 6 Del. C. §§ 15-407(e), 17-302(f), 18-302(e).  

In addition, DLLCA has been amended to provide a default rule for amending a limited liability company agreement that does not contain a provision addressing how it may be amended. This amendment to DLLCA provides that such a limited liability company agreement may be amended with the approval of all of the limited liability company’s members, or as otherwise permitted by law. As it is not entirely clear what the rule would be in the absence of this amendment, the amendment only applies to limited liability companies whose original certificate of formation is filed with the Delaware Secretary of State on or after January 1, 2012, thereby preserving the current state of the law, such as it is, for existing limited liability companies. 6 Del. C. § 18-302(f).

Correcting a Certificate of Cancellation

DRULPA and DLLCA have been amended to clarify that one may file a certificate of correction to correct a certificate of cancellation of a limited partnership or limited liability company that was filed prior to the dissolution or completion of the winding up of such limited partnership or limited liability company. 6 Del. C. §§ 17-203, 18-203. Under DRULPA and DLLCA, a certificate of cancellation terminating the existence of a limited partnership or limited liability company cannot be filed until the entity’s affairs have been completely wound up. However, there arise situations in which a certificate of cancellation has been filed and it is subsequently determined that the winding up was not complete, because, for example, the entity still has assets. If the entity has ceased to exist by virtue of the filing of a certificate of cancellation, those assets cannot be disposed of. In such instances, it has long been the practice of practitioners to file a certificate of correction to the certificate of cancellation to essentially nullify the certificate of cancellation. These amendments recognize and expressly permit this practice. It remains true, however, that a certificate of correction is not effective as to parties adversely affected by it, so this method of addressing the situation may not work in such instances and there may be situations where proceeding under Sections 17-805 of DRULPA or 18-805 of DLLCA is more appropriate.

Acting by Written Consent

The Alternative Entity Statutes have been amended to clarify that when partners of a general or limited partnership and members or managers of a limited liability company act by written consent, the document containing the consent need not necessarily repeat verbatim the precise words of the action being taken. 6 Del. C. §§ 15-407(d), 17-302(e), 17-405(d), 18-302(d), 18-404(d). The Alternative Entity Amendments facilitate the implementation of the language already in the statutes regarding the ability to consent via “electronic transmission.” In addition, this clarification should permit a partner, member, or manager to consent to the taking of an action in an electronic mail message by stating, “I consent,” “I agree,” or words of similar import without repeating the exact words to which they are consenting or agreeing as specified in the electronic mail message to which they are responding. While the authors of this article still advocate documenting actions taken with a written consent that is actually signed, the Alternative Entity Amendments recognize that in today’s fast-paced electronic world, that may not always be possible.

Limited Liability of a Partner of a Limited Liability Partnership

DRUPA has been amended to clarify that the limited liability of a partner of a limited liability partnership extends to liabilities arising out of circumstances or events occurring while the partnership is a limited liability partnership, even if the liabilities are determined or assessed at a time when the partnership is no longer a limited liability partnership. 6 Del. C. § 15-306(c). This amendment was prompted by a Texas case in which a law firm terminated its limited liability partnership status while a lawsuit was pending relating to actions taken by the partnership when it was a limited liability partnership. When the court ultimately entered a judgment against the partnership, it was held that the defining moment for determining whether the general partners would be shielded by limited liability protection was the moment when the judgment was entered. Evanston Ins. Co. v. Dillard Dep’t Stores, Inc., 602 F.3d 610 (5th Cir. 2010). This amendment to DRUPA ensures that a similar result should not occur in Delaware.

Domestications and Conversions

The Alternative Entity Statutes have been amended to require that certain documents filed in connection with (i) non-United States entities domesticating to Delaware as alternative business entities, and (ii) conversions of entities to Delaware alternative business entities, be simultaneously filed. In addition, the Alternative Entity Amendments provide that, if such documents have future effective dates, such future effective dates must be identical. 6 Del. C. §§ 15-901, 15-904, 17-215, 17-217, 18-212, 18-214.  

Cancellation of a Statement of Partnership Existence

DRUPA has been amended to clarify that the cancellation of a statement of partnership existence of a general partnership does not simultaneously operate to cancel a statement of qualification as a limited liability partnership, and vice versa. Separate certificates of cancellation must be filed with the Delaware Secretary of State for each. 6 Del. C. §§ 15-105, 15-902, 15-1001.

Names Already in Use

The Alternative Entity Statutes have been amended to prevent entities from registering under a name that is already in use by a domestic entity. Filings of record prior to July 31, 2011, however, are not required to be amended to comply with these amendments. 6 Del. C. §§ 15-108(c), 17-102(3), 18- 102(3).

Filings with Future Effective Dates

The Alternative Entity Statutes have been amended to limit the ability to have a future effective date for documents that are filed after January 1, 2012, such that the future effective date of such documents cannot be more than 180 days after the filing date. 6 Del. C. §§ 15-105(h), 17-206(b), 18-206(b).  

Postal Codes

The Alternative Entity Statutes have been amended to require the use of postal codes in certain filings and amendments to existing filings made after August 1, 2011. The Alternative Entity Amendments, however, do not require any filings of record prior to August 1, 2011 to be amended solely to include postal codes. 6 Del. C. §§ 15-105(l), 15-111(k), 17-104(k), 17-206(f), 18-104(k), 18-206(g).

Conclusion

By clarifying existing law where the clarifications were deemed beneficial and creating more flexibility where additional contractual freedoms were viewed as advantageous, the recent amendments to DRUPA, DRULPA, and DLLCA continue Delaware’s leadership as the jurisdiction of choice for the formation of all types of business entities.