Delaware General Assembly Passes Amendments to Entity Statutes [cross-posted at bergerharris.com]

The Delaware Senate has passed House Bill 126, amending the Delaware Limited Liability Company Act.  The Delaware House of Representatives passed the bill on May 15.  The Bill is expected to be signed into law by Governor Jack Markell within the next few weeks, and to go into effect August 1, 2013. The synopsis found on the General Assembly's website reads as follows:

This bill continues the practice of amending periodically the Delaware Limited Liability Company Act (the "Act") to keep it current and to maintain its national preeminence. The following is a section-by-section review of the proposed amendments of the Act.
Section 1 amends the provisions of the Act relating to mergers to confirm that rights or securities of, or interests in, a constituent party that is the surviving entity in a merger may remain outstanding in connection with the merger.
Sections 2, 3, 4 and 5 amend the provisions of the Act relating to domestication, transfer, continuance and conversion to confirm that in connection with a domestication, transfer, continuance or conversion, rights or securities of, or interests in, an entity that is domesticating or converting to a limited liability company and rights or securities of, or interests in, a limited liability company that is transferring to or domesticating or continuing in another jurisdiction or converting to a different type of entity or another jurisdiction may remain outstanding in connection with such domestication, transfer, continuance or conversion.
Section 6 amends § 18-703(d) of the Act to confirm that a charging order is the sole and exclusive remedy by which a judgment creditor of a member or a member's assignee may satisfy a judgment out of the judgment debtor's limited liability company interest and that attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has 1 member or more than 1 member.
Section 7 amends § 18-1101 of the Act by adding a new subsection (j) that confirms that the provisions of the Act shall apply whether a limited liability company has 1 member or more than 1 member.
Section 8 amends Section 18-1104 to confirm that in some circumstances fiduciary duties not explicitly provided for in the limited liability company agreement apply. For example, a manager of a manager-managed limited liability company would ordinarily have fiduciary duties even in the absence of a provision in the limited liability company agreement establishing such duties. Section 18-1101(c) continues to provide that such duties may be expanded, restricted or eliminated by the limited liability company agreement.
Section 9 provides that the proposed amendments of the Act shall become effective August 1, 2013.

Of particular note is the affirmation that the Act applies to a single member LLC with the same force as for a multi-member LLC.  This is an issue because some states, such as Florida, do not provide the same protection from creditors of single member LLCs as are available to their multi-member counterparts. In particular, some courts have ruled that a creditor of the sole member of a single-member LLC may collect a judgment from the assets of the LLC itself, even though most state LLC statutes state (as Delaware's does) that the sole remedy available to such a creditor is a charging order against distributions to the member.[1]  This amendment is intended to clarify that all of the provisions of the Delaware LLC Act, including the establishment of charging orders as a creditor's sole remedy, apply to single member as well as multi-member LLCs.

The amendment that will no doubt attract the most attention is Section 8, which amends 6 Del. C. § 18-1101 to state that "[i]n any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern" [newly added text bold and underlined]. The issue of whether managers of a Delaware LLC have default fiduciary duties (in the absence of specific provisions so stating in the LLC Agreement) is one that has been hotly debated for several years.  In 2007, Chief Justice Myron T. Steele wrote an article arguing that LLC managers do not owe traditional fiduciary duties to the members or the LLC unless specified in the company's LLC agreement.[2]  In 2012, the Court of Chancery held that a controlling member and manager of a limited liability company breached fiduciary duties to the company’s minority members because the manner in which he purchased the minority members' interests did not result in a fair price.[3] The Supreme Court affirmed but declared the Chancellor's discussion of fiduciary duties to be dicta and stated that the question of whether a manager owes members of a limited liability company default fiduciary duties remains unanswered.[4] The Court also suggested that the dispute was something the General Assembly should address.

Other amendments to the Delaware entity statutes, set forth in House Bills 123 (amendments to the Delaware Revised Uniform Partnership Act) and 124 (amendments to the Delaware Revised Uniform Limited Partnership Act) were also passed by both houses of the General Assembly and are expected to be signed into law.  These changes will be detailed here soon.

Berger Harris partner Business Law and Basics co-author Brian Gottesman serves on the Alternative Entities Subcommittee of the Delaware State Bar Association, which drafted the proposed language of the three bills for consideration by the General Assembly. 

 


[1] E.g., Shaun Olmstead, et al., v. The Federal Trade Commission, 2010 WL 2518106 (Fla.).
[2]“Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies,” 32 Del. J. Corp. L. 1 (2007).
[3] Auriga Capital Corporation v. Gatz Properties, LLC,  40 A.3d 839 (Del. Ch. 2012).
[4] Gatz Properties, LLC v. Auriga Capital Corporation, 2012 WL 5425227 (Del.).

 

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